NEW YORK (TheStreet) -- How should you allocate your investments when interest rates appear to be heading higher?
The answer in large part depends on your investment horizon. If you are in for the very long term, fluctuation of interest rates may not be very important for your strategy. But over the next couple of years, rising rates may have quite an effect on stock and bond valuations.
Despite the well-publicized rise in long-term interest rates during 2013, as the Federal Reserve prepared to begin tapering its bond purchases, rates are still at low historical levels. The market yield on 10-year U.S. Treasury bonds was 2.65% on Thursday. That's down from 3.04% at the end of last year, but up from 1.89% a year ago. But long-term rates are still expected to head higher, since the Fed plans to end its bond purchases by the end of 2014.
The yield on 5-year Treasury bonds was 1.49% Thursday, down from 1.75% at the end of 2013, but up from 0.77% a year ago.Meanwhile, the Federal Reserve continues to keep its target short-term federal funds rate in a range of zero to 0.25%, meaning that savers are really taking it on the chin, with banks paying next to nothing on savings accounts and paying very low rates on CDs. The national average interest rate for a 12-month CD is 0.20%, according to BankingMyWay, while a 24-month CD pays 0.38% and a 60-month CD pays 0.78%, on average. So the most conservative savers, with no risk tolerance, are earning very little. The S&P 500
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