Coming into 2014, almost all of Wall Street’s top economists and interest rate gurus were convinced the 30-year old bond bull market was finally ending, and interest rates would trend higher throughout the year.
In January, the consensus year-end forecast for the 10-year yield was 3.4%.
With the US economy improving and the Federal Reserve ending its quantitative easing program, rising rates seemed to be an easy call.
But that call was wrong.
This year, the yield on the 10-year Treasury note peaked at 3.05% on January 2. And it got as low as 1.86% mid-October when volatility picked up across markets.
Here’s a list of the calls made in January that we now know to be inaccurate; some in part, others entirely.
- Mark Foust, DuPont Capital Management: “We do not expect interest rates to move significantly higher over the next twelve months; they may remain relatively close to current levels with an upper bound for the ten-year treasury of 3.75%,” Foust wrote in the firm’s Fixed Income Market Review and Outlook at the beginning of the year.
- Joseph Davis, Vanguard: In the firm’s outlook for 2014, Davis noted: “The bond market continues to expect Treasury yields to rise, with a bias toward a steeper yield curve until the Federal Reserve raises short-term rates. Compared with last year’s outlook, our estimates of the “fair value” range for the 10-year Treasury bond have risen; the macroeconomic environment justifies a ten-year yield in the range of 2.75% — 3.75% at present.”
- Mike Swell, Goldman Sachs Asset Management: According to a Wall Street Journal survey of experts published on January 30, Swell “previously expected the 10-year Treasury to yield 3.5% to 4% by the end of 2014, but in light of recent market jitters he said “it’s probably more 3.5% to 3.75%.””
- Michael Schumacher, UBS AG: In the same survey, Schumacher, who’s UBS’s head of rate and credit strategy, told the Wall Street Journal that investors were not paying enough attention to the possibility of rising interest rates. “Going into January, his year-end target was for a yield of 3.20%, but he raised it to 3.50%, largely because the emerging-markets selloff is “not a complete meltdown,”” The Journal reported.
- Alex Roever, JP Morgan Chase: In the same survey, Roever said the bank saw the 10-year note yield at 3.65% at the end of 2014, although he added: “There is a big wall of worry out there right now and that is keeping rates low, and some of the bricks need to be knocked out of that wall before we see rates go higher.”
- Sharmin Mossavar-Rahmani & Brett Nelson, Goldman: In their 2014 outlook published in January, Goldman’s investment management division wrote that gradually rising interest rates would produce negative returns in investment-grade fixed income and global 10-year government bonds. “Although we expect 10-year Treasury yields to increase again this year to a range of 3 — 3.75%, the midpoint of our forecast implies a much more measured pace of ascent.”
- Joshua N. Feinman, Deutsche Asset & Wealth Management: In a US Economic Outlook note published January, Feinman saw the 10-year yield at 3.50% by the fourth quarter. “Our base-case scenario — the economy strengthens, inflation bottoms and edges up but stays low, and the Fed gradually scales back purchases further but keeps overall policy accommodative — should offer a supportive backdrop for risk assets and be a slight weight on U.S. Treasuries. But while Treasury rates may drift higher as the economy improves, they will likely do so modestly, restrained by a still far-from-exuberant recovery, tame inflation, and a still-accommodative Fed.”
- Bob Doll, Nuveen Investments: Doll saw Treasury yields moving towards 3.5% by year-end as the Fed continued its taper. “Now that they have started tapering, you would have to be bearish to think it will get dragged into 2015 and beyond,” he told Investment News. In the third quarter, Doll acknowledged it may have been too early to call.
- Scott Minerd, Guggenheim: “The upper limit for 10-year U.S. Treasury yields in the coming months should be around 3.4%,” Minerd wrote in commentary January 8. “With long-term yields rising faster than short-term yields, the yield curve has steepened over the past month and now appears consistent with the better economic momentum we’re seeing in the United States.
- Andrew Burns, World Bank: From the Global Economic Prospects report published in January: “With the tapering of monetary support beginning in January 2014, easing intervention at the long end of the yield curve should cause a further increase in yields on 10-year U.S. Treasuries that should reduce capital flows to developing countries.”
- François Dupuis & Mathieu D’Anjou, Desjardins: In a note published in January, the wrote: “If we try to imagine the situation at the end of 2014, the most likely scenario is that the Fed will have ended its quantitative easing program, fears of deflation will have eased, and investors will be starting to prepare for a key rate hike in the second half of 2015. We therefore expect 2014 to end with 10‑year yields at 3.60% for the United States and 3.30% for Canada. What’s more, wild adjustments in the bond market could still surprise us.”
- Chris Rupkey, Bank of Tokyo-Mitsubishi: “Rupkey predicts the ten-year Treasury yield will end the year at 3.5% to 3.6%,” Institutional Investor reported in January. Moreover, “Rupkey says he wouldn’t be surprised if the Fed raises rates twice this year, pushing the fed funds to 0.75 per cent and the two-year Treasury yield to 2.5% at year-end” the story noted.
- Guy LeBas, Janney Capital Markets: Institutional Investor reported in January: “It’s baked in that the Fed has indicated a reduced demand for ten-year Treasuries … He thinks the ten-year Treasury yield will gradually rise to 3.45% by the end of 2014.”
- Mike Dueker, formerly at Russell Investments: In the firm’s 2014 Annual Global Outlook, Dueker (now deceased) and his team wrote: “We believe that yields will continue to move higher, albeit modestly, to 3.2% by year-end.”
However, we found at least three folks who actually got the call right this year.
Jeffrey Gundlach, CEO of DoubleLine, told clients in his January 14 start-of-the-year webcast that the 10-year Treasury yield could fall to 2.5% at the end of the year.
“I think that there has been an embedded short position against the Treasury bond market of growing size,” he said. “And if, for whatever reason, you get some more economic weakness or other drivers to safety that lead to a decline in Treasury yields, I think there could be a major pain trade in store.”
Steven Major, HSBC’s head of fixed income research, said in a 2014 outlook that the 10-year yield would hit 2.1% by the third quarter. It reached this level in the first month of the fourth quarter.
Marc Faber, publisher of The Gloom, Boom and Doom report, advised investors to buy 10-year notes. “I don’t believe in this magnificent U.S. economic recovery,” he wrote in January. “The U.S. is going to turn down, and bond yields are going to fall.”
Even as US GDP in Q1, Faber has been largely wrong about the recovery. Still, anyone who bought bonds on that call should be thanking the doomsayer.
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