The normalisation of interest rates following the ultra-low environment of the 2010s represents one of the most significant macro shifts in a generation — and its implications for long-term investors are still working their way through asset prices, valuations and portfolio construction decisions. Toby Watson has been closely engaged with these developments, drawing on decades of experience in global finance to assess their significance. His background — including nearly 17 years working across structured credit, principal funding and hard asset lending — gives him a particularly well-developed understanding of how rate environments shape the risk and return characteristics of a wide range of asset classes.
A Decade of Low Rates and What It Left Behind
The period between the 2008 financial crisis and the post-pandemic inflation surge was, by historical standards, extraordinary. Interest rates across the major developed economies sat at or near zero for the better part of a decade. Central bank balance sheets expanded dramatically. The cost of borrowing was negligible, and the discount rates applied to future cash flows were so low that almost any asset with a credible long-term story could command a premium valuation.
For long-term investors, this environment had consequences that went well beyond short-term returns. It reshaped portfolio construction habits, encouraged a reach for yield that pushed investors into structures carrying more risk than their headline returns suggested, and embedded assumptions about valuation and correlation that are no longer reliable now that rates have moved materially higher.
The unwinding of these assumptions has been uneven and, in some areas, incomplete. Some asset classes repriced quickly when rates began to rise. Others — particularly those with long duration characteristics or high leverage — are still adjusting. Understanding where those adjustments are complete and where they are not is a central challenge for thoughtful investors today.
How should long-term investors think about a higher interest rate environment?
A higher rate environment changes the investment calculus in several important ways. Toby Watson’s perspective — grounded in his extensive experience analysing credit and funding structures during his years at Goldman Sachs International — is that the implications need to be assessed at the factor level rather than simply at the asset class level. Rising rates increase the discount rate applied to future cash flows, reducing the present value of long-duration assets, and increase the cost of leverage across any strategy that relies on borrowed capital. Understanding these dynamics at a granular level is essential for investors seeking to navigate the current environment effectively.
Toby Watson on Rate Sensitivity Across Asset Classes
One of the more important insights that Toby Watson brings to this discussion is that interest rate sensitivity is not evenly distributed — and that conventional asset class labels are often too crude to capture the real picture. Having spent nearly 17 years at Goldman Sachs International, Toby Watson developed a precise understanding of how rate movements affect complex financial structures at the factor level.
Within equities, companies with long-duration earnings profiles — typically growth-oriented businesses whose value depends heavily on cash flows expected far into the future — are considerably more sensitive to rate changes than businesses with shorter, more predictable earnings streams. The sell-off in long-duration growth equities that accompanied the rate rises of 2022 illustrated this with unusual clarity.
Within fixed income, the picture is equally nuanced. Short-duration bonds have relatively limited rate sensitivity and have benefited from higher yields in the current environment. Long-duration government bonds, by contrast, experienced significant price declines as rates moved higher — a reminder that assets commonly regarded as “safe” can carry meaningful risk when the rate environment shifts.
Navigating these distinctions requires looking through conventional labels to understand the actual risk exposures of each position — a discipline that Toby Watson has applied throughout his career in institutional finance.
Real Assets and Private Credit in a Higher Rate World
The shift to a higher rate environment has not been uniformly negative. Some areas have become more attractive precisely because rates have moved:
- Short-duration fixed income now offers yields that were simply not available during the low-rate decade, providing a more viable source of income without requiring excessive risk-taking
- Private credit has benefited from both higher base rates and the withdrawal of traditional bank lenders from certain market segments, creating opportunities for investors with the analytical capability to assess credit risk carefully
For Toby Watson, understanding these dynamics and positioning portfolios to reflect them requires the same forensic approach to rate sensitivity that defined his work on structured credit and principal funding throughout his career. The goal is not to predict the precise path of interest rates — something no investor can do reliably — but to ensure portfolios are positioned thoughtfully across a range of plausible scenarios.
The Longer-Term Implications for Portfolio Construction
Beyond the immediate effects on individual asset classes, the shift to a higher rate environment has broader implications for how portfolios should be constructed over the long term. Toby Watson’s view is that the experience of the past few years has reinforced several principles that are easy to overlook during extended periods of monetary accommodation.
The first is that duration risk deserves explicit attention — not just within fixed income, but across the full range of assets a portfolio contains. The second is that leverage carries more significant risks when borrowing costs are higher. The third is that genuine diversification across factors and return drivers becomes more rather than less important when the macro environment is in transition.t1T
Why Rate Cycles Reward Rigorous Thinking
History shows that rate cycles create both genuine risks and genuine opportunities for long-term investors. The investors who navigate them most effectively are typically those who:
- Understand their portfolio’s true factor exposures, rather than relying on surface-level asset class categorisation
- Maintain the flexibility to adjust positioning as the rate environment evolves
- Resist the temptation to extrapolate recent conditions indefinitely into the future
For Toby Watson, these are not abstract principles — they are practical disciplines shaped by years of working through complex rate environments in institutional finance. Applied consistently, they represent a sound foundation for long-term investment decision-making in a world where the cost of capital has durably changed.
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