As we approach June 2015, the first possible date for the Federal Reserve to raise interest rates, you will see two things happening;


  1. The stock market will react to the possible competition from bonds, if rates rise, with increased volatility. We have seen this in the fluctuations of the last few months and this will continue. There will not be serious corrections because the Fed is unlikely to raise rates enough to significantly compete with stocks but since there is not an underpinning of fundamentals holding the market up, anything can happen.


  1. There will be a significant sell off in bonds. When rates rise the value of existing bonds with lower rates attached, goes down. In anticipation of this, investors will want to avoid a fire sale and so liquidate their bonds before the raise actually occurs. There is new problem today which has not affected the bond market before; lack of liquidity. Regulations passed to reign in the profligate trading of banks in their own securities has affected the number of bond dealers capable of buying up bonds in a sell-off.


You do not need to be concerned about these bond related issues because they affect bond funds, not bonds held to maturity as we are doing. In fact, we are eagerly anticipating higher rates and have funds waiting to take advantage of them.