Although closely related to and integrated with economic growth, interest rates move independently from the economic cycle. They fluctuate freely via trade in the fixed income markets. As such they are both a component of the fundamental analysis of stocks and other markets, and a market in their own right. What that creates is a highly dynamic element for the fundamental analyst as interest rates move continuously and are influenced by other market elements.

Most specifically, interest rates (a component factor of fixed income security prices) are highly sensitive to inflation. Consider a bond which pays out annual interest of 10% on a fixed principal amount (par value). The real value of those interest payments will depend on the level of inflation. The higher the inflation rate, the lower the real interest rate, and vice versa.

In order to keep their real rate of return at a steady level, fixed income investors will demand higher nominal rates from their fixed income securities. For example, at a 3% rate of inflation, a 7% yield for a bond might be fine, but if inflation was 5%, the required yield may be 9%, keeping the investor