In financial markets, folks are always trying to predict something. Of course, the prediction business is difficult, and that’s particularly true when it comes to forecasting whether 10-year Treasury yields are poised to rise or decline.
It’s certainly not easy to see into the future of 10-year yields, but following a previous spike and subsequent declines for these yields and amid low benchmark rates, market participants are seemingly intent on 10-year yield predictions.
As Nationwide’s Mark Hackett points out, rates are an obvious concern today, but even professional investors aren’t all that adept are predicting 10-year yield moves.
“One of the biggest concerns for investors in the current market environment is the outlook for interest rates,” says Hackett. “This doesn’t come as a surprise given their insatiable demand for yield, especially among investors who are in or near retirement and on the hunt for adequate and consistent income. The quest for yield has pushed bond yields to near-historic lows across the credit and duration spectrum, and bond investors have enjoyed the long tailwind from falling rates and robust bond fund gains.”
He notes that since the fourth quarter of 2009 through the current quarter — a period in which 10-year yields broadly slid — pros frequently forecast that those yields would increase, and they were often proven wrong.
That’s something to remember today because Fed funds futures indicate that there’s a 60% chance that rates will increase late next year — far sooner than many investors were anticipating entering 2021.
“As of this writing, the 10-year yield is expected to be above 2.0% by next June and the Fed funds futures curve shows a near-60% probability for a Federal Reserve rate hike by the end of 2022. But predicting bond yield is a difficult endeavor. Economists and market analysts regularly miss the target in their estimates,” according to Hackett.
The other issue for investors to consider is that bonds appear to be pricing in some level of pessimism, likely in the form of slowing GDP growth, while equities are still reflecting ebullience.
“The bond market—both in the current level of interest rates and shape of the yield curve—is pricing in a peak in growth and the potential for a policy error, while equities are embedding optimism,” concludes Hackett. “This is not unusual historically; we saw a similar disconnect before the pandemic. However, the bond market isn’t clairvoyant, but it does tend to be more cautious. Closer attention to the future direction of interest rates will show us which market is right.”
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