Experts have theorized that a “great rotation” out of bonds and into other investments (primarily stocks) was likely to occur once interest rates began to rise. The bond market was a good place to be while interest rates steadily fell after Paul Volcker subdued inflation by raising the Fed Funds rate to an astounding 20% back in the early 1980s. The current Fed Funds rate, which is somewhere between 0% and 1/4%, is at its lowest level ever.
Great rotation theorists believe that rising interest rates, a scaling down of the Fed’s quantitative easing program (commonly referred to as “tapering”) or just the threat of tapering could incent bond fund investors to liquidate their holdings and look for other, more promising investments. It is thought that the bulk of the funds coming out of bonds could find their way into stocks.
For a number of years the great rotation was just a theory. However, last week The Wall Street Journal reported that the Vanguard Total Stock Market Index Fund has now become the largest mutual fund in the world. Ever since the crash, the PIMCO Total Return Fund (an intermediate term bond fund) had been the largest mutual fund. This change could signal that the great rotation is underway.
