Rebalance your portfolio amid rising rates and rising volatility

WHILE I cautioned on misguided expectations of a low yield environment and the risks facing investors last month, I did not mean to call the top nor did I expect markets to move as swiftly as they have in a matter of weeks. We've seen risk-free rates, as measured by the US 10-Year Treasury, rise briskly from 2.55 per cent to reach over 2.92 per cent in just three weeks. This has caused a re-pricing in risk assets across the board in both stocks as well as bonds.

The rise in yields in government bonds will likely be painted as the sole cause of the current sell-off, although in truth, a single factor is unlikely to be the cause of what took place in late January and early February.

Rising inflation expectations, increasing wages, peak economic momentum and an impending tidal change in monetary policy are wrecking the benign version of the Goldilocks economic environment fairy tale with higher yields and thus discount rates are causing the current market gyrations and sell-off. The earnings of companies will be affected too, given that higher costs of production are likely to reduce profit margins for those unable to raise the prices of goods sold.