The Market And Economists' Forecasts For 10-Year Yields And The FFR

As I type this, the market is exhibiting some bipolar disorder following multiple doses of Fed speak: Yesterday Bullard's presentation in Germany and Dudley's speech in New York, and today Bernanke's congressional testimony at 10 AM and the latest Fed Minutes at 2 PM.

Amidst the market confusion, I took a few minutes to review the Wall Street Journal's May survey of economists to see what they had forecast for the 10-year yield and the Fed Funds Rate out to December 2015. The survey was conducted May 3-7 and 48 economists responded, although some omitted responses to some questions.

The bond market is a few minutes from closing. A peak at Bloomberg shows the 10-year yield at 2.03 percent. Thus far in 2013 the closing low was 1.66 (twice, on May 1st and 2nd) and the closing high was 2.07 on March 11. The first chart shows the economists forecast for the yield at the end of June. I've used a 6 percent vertical scale for all charts to help us visualize the comparisons.


Here's what they forecast for the end of 2015 (note that fewer were willing to take a stab that far out).

The survey sought responses at six-month intervals. This table shows the high, low, median (middle) and average forecasts and the number of responses for the six periods.

Of course, a key driver for yield expectorations is what the Fed is doing with the Fed Funds Rate. The current set rate is 0-0.25 percent with the latest effective rate of late hovering around 0.09. Here's what the economists expect at the end of 2015.

Here is a side-by side showing the high, low and median for the 10-year yield and FFR.

For the past few months the market has been trading as if QE and Zero Interest Rate Policy would continue seemingly indefinitely. And Japan's Abenomics has no doubt supported this mindset. Yesterday's dovish presentations by Bullard and Dudley and the written testimony of Bernanke today gave the impression that the Fed was in no hurry to taper QE. But Bernanke, as a CNBC pundit interviewing Bill Gross, put it "spoke from both sides of his mouth." And the Fed minutes certainly included talk of taper alongside concerns that the economy remains at risk.

As for the tapering of QE, here is a relevant excerpt from today's Fed Minutes that contributed to the market's double-take.

A number of participants expressed willingness to adjust the flow of purchases downward as early as the June meeting if the economic information received by that time showed evidence of sufficiently strong and sustained growth; however, views differed about what evidence would be necessary and the likelihood of that outcome. One participant preferred to begin decreasing the rate of purchases immediately, while another participant preferred to add more monetary accommodation at the current meeting and mentioned that the Committee had several other tools it could potentially use to do so.

Essentially the market received a wake-up call. It may be time to start thinking ahead about trading strategies that include a less accommodative Fed.