All great points Martin! The inevitable rise in rates will have varying effects on fixed income. In general there will be less favorable investment opportunities and lower expected returns in the years ahead for fixed income.

High Yield and Corporate Bonds offer relatively attractive returns despite their strong performance in 2009. The current spreads are typical when compared to historical levels at the beginning of economic recoveries and should continue to tighten as the economy improves. These assets are less susceptible to interest rate risk and could provide decent income to portfolio with less risk then treasuries. If Treasury yields continue to rise then these bonds will not perform as strongly but will continue to outperform municipals and treasuries. However the longer term outlook for FI is not so promising.

More specifically, with bond rates at the lowest levels in a generation, we at Pring Turner are very concerned about a secular (long term) change in trend from lower rates to higher rates in the next 10 years. This will be a huge change for investors to deal with. The last 30 years have been an exceptionally favorable time for bonds (as we have seen lower and lower rates). A long term change in the trend will likely catch most bond investors by surprise. The key will be to change your tactics for owning bonds. Shorten maturities, look at floating rate securities, invest more in high quality dividend paying stocks, build a short-term bond ladder to roll over until interest rates are more favorable. Most bond investors do not have a strategy except to buy the highest yielding bond fund they can which often have the longest maturity and highest risk.