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Are Interest Rates Finally Rising?

According to recent reports, investors are beginning to move away from fixed-income assets as the risk-on trade continues to advance. This could very well be the long predicted correction in treasury prices (and longer term fixed income positions) as investors finally begin to believe that stabilization on a global basis is just around the corner.

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Perhaps investors should not be surprised that there is downward pressure on bond prices given the record low yields on highly-rated debt coupled with the percolating sign of energy driven inflation. Companies as diverse as Disney to General Electric have capitalized on record low rates as fixed-income assets became the preferred vehicle for a skittish investment public. But if inflation numbers are to be believed, and the fixed-income market is providing a true indication on the direction of interest rates, the party may be over for record low yields.

It's logical when you think about it: Does it really make sense for a 10-year U.S. Treasury investment to pay less than what a high-grade stock pays in dividends? Yes, equities fluctuate in value but it's hard to believe that an investor with a long term time horizon will not at least break-even on companies paying dividend rates greater than 2% over a 10 year time frame. This is a scenario that investors are starting to embrace.

But before you cast aside all fixed-income investments, recognize that all is not well in the global economy so a binary perspective is probably not appropriate. Just last week, KB Homes announced earnings results that disappointed Wall Street as orders were less than had been anticipated. What's shocking to me is that anyone expected positive momentum in the real estate sector given the massive inventory held by banks and a 9 percent unemployment rate.

This economy is going to continue to heal but at a slow rate. The global economy is still damaged as well with Europe still facing sovereign troubles and Asia contending with an inevitable export retrenchment slowdown. If the global economy is recovering on a slow basis, this will still be relatively good news for equity and commodity assets. Holding fixed-income assets will not be a disaster unless you take an all or nothing approach and only buy longer-term dated assets. These positions will likely face tremendous headwinds particularly if energy prices remain high.

So, what to do?

Stay short to intermediate term on your fixed-income assets. Buy quality and also non-investment grade fixed-income positions. Don't focus just on the United States, but have a global component to your fixed-income strategy. And perhaps more than any time in the last five years, be ready to take action if inflation begins to accelerate.

A long-term strategy is important for investment success in equities but also in fixed-income investing. Warren Buffet adopts this view and Berkshire Hathaway's results underscore that success of a patient perspective. But like Warren Buffett, don't be afraid to tactically adjust as necessary; selling when others are greedy and buying when panic reigns.

Be decisive; don't be afraid to be contrarian. Taking action a little early when making your portfolio decisions; it's better to be proactive than wait until the rest of the world stampedes towards the exits. This might be very good advice given the amount of long term debt held by investors. When the time to sell is obvious, you can expect a very crowded trade.

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Michael Yoshikami, Ph.D., CFP®, is CEO, Founder and Chairman of the DWM Investment Committee at Destination Wealth Management. Michael is a CNBC Contributor and appears regularly on the network. DWM is a San Francisco Bay Area-based independent money management firm that provides fee-based wealth management services to institutions and individuals around the world. Michael was named by Barron's as one of the Top 100 Independent Financial Advisors for 2009, 2010 and 2011.