Interest rates and asset prices

If you internalize one transmission chain from this whole track, make it this one: interest rates drive asset prices. It is the single most important relationship in markets.

Why rates set the value of everything

The value of any asset is, in theory, the sum of the cash it will produce in the future, discounted back to today. The discount rate is built on the prevailing interest rate. So:

• When rates rise, future cash flows are discounted more harshly and are worth less today → asset prices fall.
• When rates fall, future cash is discounted gently and worth more today → asset prices rise.

How each asset class responds

• Bonds — the most direct link. Bond prices move inversely to yields: when rates rise, the price of existing bonds falls (their fixed coupon is now less attractive), and vice versa.
• Stocks — higher rates hurt in two ways: future profits are discounted more, and safe bonds/savings now compete for investors' money. Growth stocks, whose value sits far in the future, are hit hardest; value and dividend stocks are more resilient.
• Real estate — financed with debt, so higher mortgage and financing rates cool demand and prices.

The Brazilian angle

This is why the SELIC dominates Brazilian asset allocation. When the SELIC is high, the risk-free Tesouro Selic might pay double digits with near-zero risk, setting a punishing bar for the Bovespa to clear. Money rotates out of stocks into fixed income. When the Copom cuts, that risk-free return shrinks and capital flows back toward equities and real-estate funds. Watch the SELIC trajectory and you can anticipate the broad tide for Brazilian risk assets.