## Interest Rates and Investor Decisions: The Long and Short of It

_IMF Blog, September 13, 2011_

## Source details

**Canonical URL:** [Interest Rates and Investor Decisions: The Long and Short of It](https://www.imf.org/en/blogs/articles/2011/09/13/interest-rates-and-investor-decisions-the-long-and-short-of-it)

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## Bibliographic details
- Authors: Erik Oppers
- Published: September 13, 2011

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### Summary findings
- Long-horizon institutional investors generally do not look at differences in interest rates among countries when deciding where to invest.
- The primary factors these long-term investors consider are:
  - good and stable growth prospects,
  - low country risks—including political and economic stability,
  - a stable exchange rate.
- Interest rates (short-term, long-term, real, and nominal) generally did not affect institutional investors’ allocations to equities or bonds.

### Investor types and sensitivity to interest rates
- Institutional investors:
  - Typically have long investment horizons with obligations that often stretch out over decades.
  - Focus on long-run returns and invest their own cash rather than borrowed money.
  - Show little response to interest-rate differentials across countries.
- Leveraged investors (not directly covered by the research):
  - Include hedge funds and carry traders who borrow money to invest.
  - Are likely more sensitive to interest-rate differentials because borrowing rates are a direct cost rather than an opportunity cost.
  - Face increased risk through leverage, making portfolios more sensitive to underlying fundamentals, including interest rates.

### Role and market impact of leveraged investors
- Relative size:
  - Institutional investors examined hold by far the largest amount of total assets to invest—over $70 trillion dollars.
  - Total investable assets of leveraged investors are much smaller, probably around one-tenth of the assets of institutional investors.
- Market behavior and volatility:
  - Leveraged investors trade much more frequently, moving money in and out of markets and countries to seek short-term opportunities.
  - Their trading behavior can have a large impact on market volatility despite smaller asset size.
  - In times of market turmoil, leveraged investors may be forced to sell to avoid losses that exceed initial investment, while long-term investors may be more inclined to ride out downturns.

### Persistence of low interest rates: potential shifts in behavior
- Current behavior:
  - Many institutional investors are accepting lower returns without moving funds to higher-interest, higher-risk countries or into other riskier domestic assets.
- Potential future behavior if low rates persist:
  - Low interest rates can hurt the financial position of institutional investors that need to earn a certain minimum return (for example, pension plans with promises based on much higher expected rates of return).
  - The longer the low interest rates prevail, the greater the pressure for these investors to “search for yield,” which could increase sensitivity to interest-rate differentials over time.
- Long-run outlook:
  - Despite this risk, the long-run story is expected to remain: long-term investment flows are likely to be dominated by long-run institutional investors who prioritize growth prospects and country risks over interest-rate differentials.

### Key statistics and exact figures from the analysis
- Total assets held by institutional investors examined: over $70 trillion dollars.
- Estimated total investable assets of leveraged investors: probably around one-tenth of the assets of institutional investors.

*Source: Interest Rates and Investor Decisions: The Long and Short of It (Erik Oppers, September 13, 2011).*

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## Content in this bundle

- **Chapter 2**
  - [Chapter 2 (Markdown version)](/external/pubs/ft/gfsr/2011/02/pdf/ch2.pdf.md){rel="alternate" type="text/markdown"}
  - [Chapter 2 (PDF)](/external/pubs/ft/gfsr/2011/02/pdf/ch2.pdf){rel="external" type="application/pdf"}

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_Source: https://www.imf.org/en/blogs/articles/2011/09/13/interest-rates-and-investor-decisions-the-long-and-short-of-it_