Long-term rates have spiked since the Fed's tapering comments - 10-year Treasury rates have jumped almost 1.0% from a low of 1.6% in early May to roughly 2.6% this week. Investors, faced with the potential of negative fixed income returns after a long bull bond market, are diversifying to equities as a potential hedge against rising rates. Daniel Morillo, iShares Head of Investment Research, however, warns that investors should look before they leap. It is not necessarily the case that equity and bond excess returns reliably move in opposite directions, especially in the long run. So, should investors avoid adding to equity holdings if they're concerned about rising rates? Not quite. The upshot is that the larger average excess return of equities absorbs the impact of low or negative bond returns when rates rise. However, the potential cost is the higher overall risk of equities over bonds. (VIEW LINK)
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