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Last month, Alphaville wrote an article about how difficult it is to predict, especially when it comes to interest rates. And even if you know exactly what interest rates will be, there’s no guarantee you can predict its impact, including how bond yields will react.
We belatedly realized that the US Treasury market’s reaction to the fabled “Fed Pivot” that finally materialized in September was a perfect example of how difficult financial forecasting can be.
Investors and analysts have been expecting the Fed to cut rates again for about two years. The belief that this would end the bond market’s punishment and peak yields drove a record $600 billion in inflows into bond funds last year.
And yet. . .
Since the first 50 basis point jumbo rate cut in September, the Fed has lowered rates again in its next two meetings, including two more quarter-point rate cuts for 2025. , the 10-year Treasury yield actually rose by about 90 basis points.
Yes, this is nothing new. The only thing that catches the eye is mainly the scale. And this is clearly a somewhat facile argument, given that yields had already fallen considerably in the months leading up to the widely suggested September pivot. Long-term bonds fluctuate for all sorts of reasons that have little to do with the ebb and flow of interest rates.
But most analysts were completely wrong, even after it became clear that there was an element of “buy the rumor, sell the news” when yields rose immediately after the FOMC meeting and rate cut.
In late September, the median Wall Street strategist forecast was for post-FOMC yield increases to recede, with the 10-year Treasury yield at 3.74% at the end of 2024. In reality, it settled at 4.57%. It’s tempting to paraphrase the old joke about foreign exchange analysts and say that God created fixed income strategists to make economists look accurate.
In defense of bond strategists, there was another high-profile event in November that clearly changed the outlook for inflation for the rest of the year. However, it was not an unexpected event. And most of the 2025 outlook reports compiled and sent in November and December still expected yields to decline modestly through the end of the year and into next year.
This trend remains true even though new forecasts trickle in from time to time. The median forecast as of Pixel among 51 bond analysts surveyed by Bloomberg is for the 10-year Treasury yield to fall to 4.15% by the end of 2025.
In fact, only three of them predict it could rise from today’s 4.59% level (of which ING’s James Knightley has the highest forecast, at 5.5%). ).
Interestingly, market-implied forecasts derived from interest rate forwards indicate that investors are a bit more pessimistic, believing the 10-year Treasury yield will be 4.67% by the end of 2025.
The only prediction Alphaville can comfortably make is that everyone will probably be wrong in some way, and that the road will be bumpy. Remember us in our institutional rankings.