Why aren't bond mutual funds seeing huge selloffs now?
The Fed sets the overnight borrowing costs by setting its overnight target rate.  The markets determine the rates at which the treasury can borrow through the issuance of bonds. The Fed's actions will certainly influence the price of very short term bonds, but the Fed's influence on anything other than very short term bonds in the current environment is very muted. Currently, the most influential factor keeping bond prices high and yields low is the high demand for US treasuries coming from overseas governments and institutions.  This is being caused by two factors : sluggish growth in overseas economies and the ongoing strength of the US dollar.  With many European government bonds offering negative redemption yields, income investors see US yields as relatively attractive.  Those non-US economies which do not have negative bond yields either have near zero yields or large currency risks or both.  Political issues such as the survival of the Euro also weigh heavily on market perceptions of the current attractiveness of the US dollar.  Italian banks may be about to deliver a shock to the Eurozone, and the Spanish and French banks may not be far behind. Another factor is the continued threat of deflation.  Growth is slowing around the world which negatively effects demand.  Commodity prices remain depressed. Low growth and recession outside of the US translate into a prolonged period of near zero interest rates elsewhere together with renewed QE programmes in Europe, Japan, and possibly elsewhere.  This makes the US look relatively attractive and so there is huge demand for US dollars and bonds.  Any significant move in US interest rates risks driving to dollar ever higher which would be very negative for the future earning of US companies which rely on exports and foreign income.  All of this makes the market believe that the Fed's hands are tied and low bond yields are here for the foreseeable future.    Of course, even in the US growth is relatively slow and vulnerable to a loss of steam following a move in interest rates. Since 1971, mortgage interest rates have never been more than .25% below current rates (3.6%).  Even restricting just to the last four years, rates have been as much as .89% higher.  Overall, we're much closer to the record low interest rate than any type of high.  We're currently at a three-year low.   Yes, we should expect interest rates to go up.  Eventually.  Maybe when that happens, bonds will fall.  It hasn't happened yet though.  In fact, there remain significant worries that the Fed has been overly aggressive in raising rates (as it was around 2008).  The Brexit side effects seem to be leaning towards an easing in monetary policy rather than a tightening.
"This is the sad state of US stock markets and Regulation T. Yes, while options have cleared & settled for t+1 (trade +1 day) for years and now actually clear ""instantly"" on some exchanges, stocks still clear & settle in t+3.  There really is no excuse for it. If you are in a margin account, regulations permit the trading of unsettled funds without affecting margin requirements, so your funds in effect are available immediately after trading but aren't considered margin loans.  Some strict brokers will even restrict the amount of uncleared margin funds you can trade with (Scottrade used to be hyper safe and was the only online discount broker that did this years ago); others will allow you to withdraw a large percentage of your funds immediately (I think E*Trade lets you withdraw up to 90% of unsettled funds immediately). If you are in a cash account, you are authorized to buy with unsettled funds, but you can't sell purchases made on unsettled funds until such funds clear, or you'll be barred for 90 days from trading as your letter threatened; besides, most brokers don't allow this.  You certainly aren't allowed to withdraw unsettled funds (by your broker) in such an account as it would technically constitute a loan for which you aren't even liable since you've agreed to no loan contract, a margin agreement.  I can't be sure if that actually violates Reg T, but when I am, I'll edit. While it is true that all marketable options are cleared through one central entity, the Options Clearing Corporation, with stocks, clearing & settling still occurs between brokers, netting their transactions between each other electronically. All financial products could clear & settle immediately imo, and I'd rather not start a firestorm by giving my opinion why not. Don't even get me started on the bond market... As to the actual process, it's called ""clearing & settling"". The general process (which can generally be applied to all financial instruments from cash deposits to derivatives trading) is: The reason why all of the old financial companies were grouped on Wall St. is because they'd have runners physically carting all of the certificates from building to building.  Then, they discovered netting so slowed down the process to balance the accounts and only cart the net amounts of certificates they owed each other.  This is how we get the term ""bankers hours"" where financial firms would close to the public early to account for the days trading.  While this is all really done instantly behind your back at your broker, they've conveniently kept the short hours." Risk. Volatility. Liquidity. Etc.  All exist on a spectrum, these are all comparative measures.  To the general question, is a mutual fund a good alternative to a savings account? No, but that doesn't mean it is a bad idea for your to allocate some of your assets in to one right now. Mutual funds, even low volatility stock/bond blended mutual funds with low fees still experience some volatility which is infinitely more volatility than a savings account.  The point of a savings account is knowing for certain that your money will be there.  Certainty lets you plan. Very simplistically, you want to set yourself up with a checking account, a savings account, then investments.  This is really about near term planning.  You need to buy lunch today, you need to pay your electricity bill today etc, that's checking account activity.  You want to sock away money for a vacation, you have an unexpected car repair, these are savings account activities.  This is your foundation.  How much of a foundation you need will scale with your income and spending.   Beyond your basic financial foundation you invest.  What you invest in will depend on your willingness to pay attention and learn, and your general risk tolerance. Sure, in this day and age, it is easy to get money back out of an investment account, but you don't want to get in the habit of taping investments for every little thing. Checking: No volatility, completely liquid, no risk Savings: No volatility, very liquid, no principal risk  Investments: (Pick your poison) The point is you carefully arrange your near term foundation so you can push up the risk and volatility in your investment endeavors.  Your savings account might be spread between a vanilla savings account and some CDs or a money market fund, but never stock (including ETF/Mutual Funds and blended Stock/Bond funds). Should you move your savings account to this mutual fund, no.  Should you maybe look at your finances and allocate some of your assets to this mutual fund, sure.  Just look at where you stand once a year and adjust your checking and savings to your existing spending.  Savings accounts aren't sexy and the yields are awful at the moment but that doesn't mean you go chasing yield.  The idea is you want to insulate your investing from your day to day life so you can make unemotional deliberate investment decisions. SPY is up 29% YTD. If you are 100% S&P and not up 28.9% plus your deposits, I'd be concerned — check your fund's management fees. Are you calling a top?  Proper asset allocation would adjust holding on a regular basis. At the simplest level, say 70% S&P 30% short term/bond fund. It's time to re-adjust to the mix that's right for you, and not market-time. If 2014 sees a huge drop, the re-allocation to 70/30 buys back in at a lower price. If up again, a bit gets shifted out. Last, it makes sense for your deposits to match your allocation split, to lessen the divergence from your target numbers. Note: Asset allocation is a bit more complex than I just described. A good thing to research a bit. (Happy to see someone edit a couple good references here, especially if they aren't looking to offer a full response.) Here are a few choice questions on this site that are related to asset allocation: Regarding the Summer of 2011 Crisis: There is NO reason that the United States cannot continue borrowing like it is just based on a particular ratio:  Debt to GDP. The Debt to GDP ratio right now is around 100%, or 1:1. This means the US GDP is around $14 Trillion and its debt is also around $14 trillion.  Other countries have higher debt:gdp ratios Japan - for instance - has a debt:gdp ratio of 220% Regarding a selloff of stocks, dollars and bonds: you have to realize that selling pressure on the dollar will make THE PRICE OF EVERYTHING increase. So commodities and stocks will skyrocket proportionally. The stockmarket can selloff faster than the dollar though. And both markets have circuit breakers that can attempt to curb quick selloffs. Effectiveness pending. Your question asked about a specific time the yield curve flattened or inverted.  There are other times when the yield curve inverted or flattened.  You also imply in your question that investors were flocking to long term bonds which lowered their yields.  I don't believe this is the case.  I believe investors were fleeing from short term bonds causing the yields on short term bonds to rise to meet those of long term bonds. The chart below shows the history of yields on US bonds over time.  The shaded areas are where the yield curve flattened or inverted.  Notice that after 1982 it is the short term yields that rise sharply to meet or cross the yields on longer term bonds.  The yields on longer term bonds move little compared to the movement in yields on the short term bonds.  Thus it is investors moving out of short term bonds that cause the yield curve to flatten or invert.  These investors are not moving into longer term bonds since the yields on the longer term bonds do not move much at all at these times.  In fact, in 2006 the longer term bond market was only 25% of the total US public debt while short term bonds made up 75%.  It would take less money to move the yields on longer term bonds than it would on short term bonds yet the longer term yields did not move near as much as short term yields.  So why are investors or banks moving out of short term bonds causing their yields to rise?  I believe this happens for one of two reasons:  they are moving into higher yielding investments or they need to raise cash to cover bad investments.  Charts and more information here. Without providing direct investment advice, I can tell you that bond most assuredly are not recession-proof.  All investments have risk, and each recession will impact asset-classes slightly differently. Before getting started, BONDS are LOANS.  You are loaning money.  Don't ever think of them as anything but that. Bonds/Loans have two chief risks: default risk and inflation risk.   Default risk is the most obvious risk. This is when the person to whom you are loaning, does not pay back.  In a recession, this can easily happen if the debtor is a company, and the company goes bankrupt in the recessionary environment. Inflation risk is a more subtle risk, and occurs when the (fixed) interest rate on your loan yields less than the inflation rate.  This causes the 'real' value of your investment to depreciate over time.   The second risk is most pronounced when the bonds that you own are government bonds, and the recession causes the government to be unable to pay back its debts.  In these circumstances, the government may print more money to pay back its creditors, generating inflation. I have had similar thoughts regarding alternative diversifiers for the reasons you mention, but for the most part they don't exist.  Gold is often mentioned, but outside of 1972-1974 when the US went off the gold standard, it hasn't been very effective in the diversification role.  Cash can help a little, but it also fails to effectively protect you in a bear market, as measured by portfolio drawdowns as well as std dev, relative to gov't bonds. There are alternative assets, reverse ETFs, etc which can fulfill a specific short term defensive role in your portfolio, but which can be very dangerous and are especially poor as a long term solution; while some people claim to use them for effective results, I haven't seen anything verifiable. I don't recommend them. Gov't bonds really do have a negative correlation to equities during periods in which equities underperform (timing is often slightly delayed), and that makes them more valuable than any other asset class as a diversifier.  If you are concerned about rate increases, avoid LT gov't bond funds.  Intermediate will work, but will take a few hits... short term bonds will be the safest.  Personally I'm in Intermediates (30%), and willing to take the modest hit, in exchange for the overall portfolio protection they provide against an equity downturn.  If the hit concerns you, Tips may provide some long term help, assuming inflation rises along with rates to some degree. I personally think Tips give up too much return when equity performance is strong, but it's a modest concern - Tips may suit you better than any other option.  In general, I'm less concerned with a single asset class than with the long term performance of my total portfolio. Most bond ETFs have switched to monthly dividends paid on the first of each month, in an attempt to standardize across the market.  For ETFs (but perhaps not bond mutual funds, as suggested in the above answer) interest does accrue in the NAV, so the price of the fund does drop on ex-date by an amount equal to the dividend paid. A great example of this dynamic can be seen in FLOT, a bond ETF holding floating rate corporate bonds.  As you can see in this screenshot, the NAV has followed a sharp up and down pattern, almost like the teeth of a saw. This is explained by interest accruing in the NAV over the course of each month, until it is paid out in a dividend, dropping the NAV sharply in one day. The effect has been particularly pronounced recently because the floating coupon payments have increased significantly (benchmark interest rates are higher) and mark-to-market changes in credit spreads of the constituent bonds have been very muted.