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Must-know: Preparing your equity portfolio for rising rates

Must-know: Preparing your equity portfolio for rising rates (Part 1 of 5)

While Russ doesn’t foresee a bond market meltdown, he does expect that rates will rise in coming years and he offers three suggestions for positioning equity portfolios in preparation.

Even as the Federal Reserve (or Fed) has begun tapering its asset purchases in January, I don’t believe a bond market meltdown is imminent thanks to the many factors helping to keep a lid on interest rates.

Market Realist – The graph above shows the holdings and purchases of the Federal Reserve since 2010. Due to the bond (IEF) buying program introduced as a stimulus for the U.S. economy, the holdings have continued to rise and are likely to ease up in October when the program is slated to end.

U.S. Bond (BND) yields have faced downward pressure primarily because of quantitative easing, which focuses on purchasing ten-year Treasuries (IEF).

The other prime reason for low rates has been escalating geopolitical tensions in Ukraine, Russia (RSX), and Gaza. These conflicts have caused investors to flood to U.S. Treasuries (TLT), often considered safe haven assets.

The slowdown in other developed economies like Japan (EWJ) and the Eurozone (EZU) has affected yields too. Since U.S. Treasuries look better in comparison to German bunds (yielding less than 1%) and other European bonds, investors are flocking to the securities.

With interest rates set to rise in 2015, it’s important for investors to understand how to protect their portfolios. Read on to the next part of this series to see why equities perform better in a rising rate environment.

Continue to Part 2

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