What Should Investors Do With Bond Proxies As Rates Rise?

So-called bond proxies have become extremely popular with investors since the financial crisis. These proxies usually take the form of low volatility, defensive or high yielding equities, which provide a bond like returns but offer a higher yield.

Plunging bond yields have only increased the demand for these proxies during the past two years and as a result, many high yielding/defensive/low volatility stocks are now trading at nosebleed valuations.

Falling bond yields have also propelled equity markets higher as the lower risk-free rates are plugged into DCF calculations and the equity risk premium spread remains constant. The question equity investors now have to ask themselves is, what will happen to equity valuations when interest rates start...