Returns assume dividend reinvestment and do not include any types of management fees, transaction costs or expenses. 

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June was a tough month for nearly all asset classes, even for US stocks which have seemed impervious to bad news in 2013. Notable among the losses, nearly all types of bond funds were down for the month. As bond prices move inversely to yield, this reflects a marked rise in rates over the last two months. There is little doubt that this is a result of investors repricing bond holdings purely due to the fear the Federal Reserve will begin "tapering" their asset purchases later in the year. The other drivers of bond yields have remained benign as GDP growth was restrained in the first quarter and is likely to be so in the second quarter. Inflation expectations are declining as reflected in the chart below which shows the difference between 10 year treasury yield and 10 year TIP yield. In essence this shows the future inflation rate investors expect to see, and it has been declining rapidly the last quarter.

In summary- rising rates can expose some problems (see the History Speaks section above regarding Orange County in 1994) and a first order effect will be a flow of investor dollars out of bond funds (see our Chart of the Month above). There has been a noticeable effort by the Federal Reserve to dial back the market's expectation on the timing and speed it will slow down its asset purchases. While Fed officials would prefer to see rates go higher in the longer term, rapid moves in yields can have adverse effects on bonds, mortgages and the banking sector. In the meantime, we still advise caution to those tempted to abandon their bond holdings. Bonds still play an important role in limiting volatility and providing stability in a diversified portfolio. Large moves down in any asset class inherently cause investors- large and small- to consider selling and walking away, but making these reactive decisions in the midst of such a move rarely works out to an investor's advantage.