Investors on Thursday put aside their bond market anxieties. For now.

U.S. stocks hit new highs today. The Dow Jones Industrial Average, S&P 500 and Nasdaq all ended in the green. The rally was broad-based.

Health and technology were the top performing sectors. The market continues to reward firms that deliver innovation. If you seek new growth opportunities, bet on breakthrough tech. Even in this frothy market, the “disruptors” should outperform.

Worries that China would halt U.S. bond purchases eased on Thursday. Investors turned their attention to earnings. Fourth-quarter results are expected to be strong. The earnings season kicks off Friday. Big banks will stand and deliver.

Animal spirits returned to the markets. Interest rate fears took a back seat. But don’t kid yourself. Those risks haven’t gone away.

The great unwinding…

At the top of your list of worries, put monetary policy.

The Federal Reserve raised rates three times last year. The Fed expects three more rate increases for 2018. Some analysts forecast at least four hikes.

For nearly 10 years, central banks have been the biggest buyers of bonds. Interest rates fell. Stocks soared. Now, the party is ending.

Rich nations began amassing bonds in the wake of the global financial meltdown. The goal: keep a full-blown depression at bay. It worked. But now, that money is getting sucked out of the system.

Investors fret that the global economy may overheat. Inflation could prompt central banks to tighten more than expected.

In recent weeks, investors have been dumping bonds. This retreat pushed the yield on the benchmark 10-year U.S. Treasury bill to a high of 2.59% on Wednesday, before easing to 2.55%. That’s near the four-year-high of 2.63% in March.

On Wednesday, China said it might curtail its purchases of U.S. Treasury bonds. The country holds $1.2 trillion in U.S. debt. Stocks posted their first down day of the year.

China’s warning about bonds could be political. President Trump threatens China with a trade war. He pressures China over North Korea. He accuses the Chinese of manipulating currency. China’s response: treat us with respect. Or we’ll stop financing you.

Another cloud: Trump said he might pull the U.S. out of the North American Free-Trade Agreement (NAFTA) with Canada and Mexico. Ottawa warned on Thursday that if NAFTA unravels, global growth suffers.

U.S. tax overhaul poses concerns, too. Sure, it’s a windfall for business. But the measure passed last month is regressive and unfunded. Trump’s tax plan could backfire on Wall Street. The tax cuts undermine America’s financial strength. They could make U.S. debt less attractive to investors.

The tax bill blows up the federal deficit. This was intended. GOP lawmakers admit that the bill was designed to force cuts in programs. New estimates from the Committee for a Responsible Federal Budget put annual deficits at $2.1 trillion by 2027. That’s 7% of gross domestic product. Treasury financing needs will rise significantly in 2018 and beyond.

Three central banks own $14 trillion in securities: $4.4 trillion by the Federal Reserve; $5 trillion by the European Central Bank; and $4.5 trillion by the Bank of Japan. That’s a lot of money, in the hands of a few bureaucrats.

The bond-buying binge started in 2009. The size of the stimulus is unprecedented. How will the “great unwinding” pan out? History offers no guide. In the meantime, stocks continue their hot streak.

Enjoy your gains, but raise cash levels. Below, I discuss an inflation hedge.

Thursday Market Wrap

• DJIA: +0.81% or +205.60 points to close at 25,574.73
  
• S&P 500: +0.70% or +19.33 points to close at 2,767.56
  
• Nasdaq: +0.81% or +58.21 points to close at 7,211.78
  

Thursday’s Big Gainers

• Community Health Systems (NYSE: CYH) +23.63%

Investor hikes stake in hospital operator.

• W&T Offshore (NYSE: WTI) +9.98%

Rising oil prices boost energy firm.

• Teva Pharmaceutical (NYSE: TEVA) +8.48%

Biotech in turnaround mode.

Thursday’s Big Decliners

• Eastman Kodak (NYSE: KODK) -22.43%

Investors take profits after huge run-up.

• Orchid Island Capital (NYSE: ORC) -7.42%

Finance firm cuts dividend.

• Alamos Gold (NYSE: AGI) -6.95%

Mine potential disappoints.

Letters to the Editor 

“Should I be worried about the bond funds in my portfolio?” — Maria J.

Your portfolio needs the safety of bonds. Bonds provide ballast during stock market turbulence.

The price of bonds moves in the opposite direction of yield. When interest rates rise, prices of existing bonds decline.

As central banks unwind their holdings, investors are asking: What should they do with the bonds in their portfolios? Dump them, too? The answer is no.

Not all bonds get crushed when the Fed tightens. Short-term bonds are less vulnerable to interest rates than longer-term bonds.

Consider inflation-protected bond mutual funds. They offer investors exposure to U.S. and international inflation-protected debt. Most of these funds invest in Treasury inflation-protected securities (TIPS), which are U.S. Treasury securities that are indexed to the CPI.

Questions about bonds? Drop me a line: mailbag@investingdaily.com

John Persinos is managing editor of Personal Finance and chief investment strategist of Breakthrough Tech Profits.