Reuters polled primary dealers on their outlook for interest rates over the next three, six, and twelve months.
- 6 of 30 dealers think the 10 year note yield will fall to or below 3.50% in the next three months.
- 12 of 30 say the 10 year will move up to or over 4.00% in the next three months.
- 12 of 30 dealers say the 10 year will hold between 3.51% and 3.99%. I am in this camp.
Attempting to forecast yields further out is like playing pin the tail on the donkey. The level of uncertainty surrounding the housing and labor markets makes it impossible to get a true handle on just how far yields will rise or fall heading into the summer months.
I forecast a range trade between 3.52 and 3.85% with outlier tests of 4.00% a possibility. While the worst case macroeconomic scenario has likely been avoided, I do not believe current stock market sentiment has accurately discounted future cash flows. Instead, equity indexes have benefited from low volatility/low trading volume big cap stock rallies (which portfolio managers must chase). I am not saying I expect a big equity side sell off...I am stating that I not feel the market is taking housing and labor market weakness seriously enough, thus at some point the stock rally must be questioned by the market. This will result in a retest of lower price levels (MY PREVIOUS CALL WAS 1200 TOP IN S&P).
With that in mind, retail investors will likely maintain their overall nervous stance... which should manifest itself via a continued allocation into risk averse US Treasuries. This will help keep benchmark interest rates from skyrocketing.
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