Interest Rate Shock Simulator
Model how aggressive central bank rate hikes or cuts cascade across yield curve term premiums, 30-year fixed mortgages, treasury bond duration losses, and equity DCF hurdle rates.
Yield Curve Repricing & Macro Stress
Debt Service Stress Test Monthly P&I
- 30Y Fixed Payment $3,530 / mo
- Baseline 3.5% Era Payment $2,245 / mo
- Monthly Payment Shock +$1,285 (+57.2%)
- Total 30Y Interest Paid $770,800
Asset Valuation & Sensitivity Discount Factor
- Taylor Rule Fair Fed Funds 5.80%
- Policy Gap (Hawkish/Dovish) -0.55% (Dovish bias)
- High-Yield Credit Spread Est. 9.15%
- Cash Risk-Free Real Yield +2.05%
The Transmission Mechanism of Higher Rates
Why rate hikes don't just affect bank accounts, but actively reprice the entire global capital stack.
1. Duration & Bond Convexity
When yields increase, fixed-coupon bond prices fall exponentially with their maturity duration. A 10-year Treasury with a modified duration of ~8 years loses roughly 8% in capital value for each 100 basis point (+1.0%) spike in yield.
2. Inversion & Recession Signals
When the 2-Year Treasury yield climbs above the 10-Year Treasury yield, the yield curve inverts. Historically, persistent inversion signals that aggressive tightening will eventually trigger an economic slowdown or contraction.
3. Equity DCF Discounting
Higher risk-free rates raise the hurdle rate (WACC) used to discount future cash flows. Long-duration high-multiple equities and speculative tech endure the steepest contraction because their projected earnings are furthest in the future.
How does the Taylor Rule benchmark calculate fair rates?
The standard Taylor Rule formula is $i = r^* + \pi + 0.5(\pi - \pi^*) + 0.5(y - y^*)$, where $r^*$ is the neutral real interest rate (~1.5–2.0%), $\pi$ is current inflation, $\pi^*$ is the 2.0% target inflation, and $(y - y^*)$ is the output gap. If the central bank rate is below the Taylor rate, monetary policy remains loose relative to inflation.
What causes the mortgage spread to widen or contract?
The 30-year fixed mortgage yield traditionally trades at a 150 to 180 basis point (+1.5% to +1.8%) spread over the 10-Year Treasury note. During periods of volatility or quantitative tightening when the Fed shrinks mortgage-backed security (MBS) holdings, that spread can widen to 270–320 basis points, creating higher borrowing costs even if 10-year yields stay unchanged.