Interest Rate Forecasts Continue to Overshoot Predictions

January 21, 2016

Interest Rate Forecasts Continue to Overshoot Predictions Photo

Since the end of the financial crisis, investors have been regularly warned to avoid long-term bonds as improving economic conditions in the United States were certain to push interest rates higher. Seven years after the crisis, predictions for higher interest rates in the United States have yet to materialize. Interest rates remain stuck at low levels due to secular deflationary forces and extraordinary monetary policy accommodation across the globe.

This week's chart displays a recent history of interest rate projections from economists compared to actual rate levels realized one year later. Data was taken from the Federal Reserve Bank of Philadelphia's Survey of Professional Forecasters. The first (blue) bar represents median one-year projections for the 10-year Treasury yield (e.g., forecast for the fourth quarter of 2010 was taken from the fourth quarter 2009 Survey). The second (orange) bar represents the actual interest levels realized during the quarter and the third (green) bar the forecast error. Only once since the 2009 Survey have 10-year Treasury yields finished higher than the median forecast (during 2013’s “taper tantrum,” 10-year rates ended the year above 3%). Forecasters have been remarkably consistent in the average size of their miss, overshooting the mark by approximately 1% in every year except 2013.

Key Takeaway: Persistent low interest rates in the United State since the financial crisis continue to confound economic forecasters. Based on the sharp rally in rates so far during 2016, this year's fourth quarter forecast 10-year Treasury yield of 2.85% may again miss on the mark on the high side. Fixed income investors will likely face another year challenged by a low interest rate environment.

Tags: Chart of the Week | Interest Rate | Forecast | Economists

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This material is for informational use only. The views expressed are those of the author, and do not necessarily reflect the views of Penn Mutual Asset Management.  This material is not intended to be relied upon as a forecast, research or investment advice, and it is not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

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