Wall Street Journal Economists' Forecasts For 10-Year Yields And The Fed Funds Rate

Includes: TLT
by: Doug Short

The yield on the 10-Year Treasury Note closed just off an interim high at 2.73% on Aug. 2, which was the start date for the latest Wall Street Journal survey of economists (Aug. 2-6). With the ongoing debate over the direction of Treasury yields, a key issue addressed in the survey is where economists expect the 10-year yield to be across five six-month intervals from December 2013 to December 2015.

The survey was sent to 52 economists, 46 of whom responded. Of the 46, some skipped individual survey questions. Here is a table showing the major response statistics: Low, Median (middle), Average (aka Mean), Mode (most frequent), and High.

As we readily see from the table, the responses for year-end 2013 fit a rather narrow range, with the median and mode only 2-3 bps above the Aug. 2 close. But more interesting is where the economists see 10-year yields at the end of 2015. The spread is substantial, ranging from about 60 bps below today's intraday number as I type this to a high of 5.25%. Note, however, that the median and average are close together and a little over 1% above the 2013 year-end forecast.

Of course, a key driver for yield expectations is what the Fed does with the Fed Funds Rate. The current set rate is 0%-0.25%, with the latest effective rate hovering around 0.08.

Here's a closer look at the array of opinions for the end of 2015.

Here is a side-by side comparison showing the high, low, and median for the 10-year yield and FFR (note that I've kept the same 0%-6% vertical axis).

I'll close with a table showing the median and mean spreads between the 10-year-yield and FFR forecasts.

The popular financial press keeps hammering the theme of the market's focus on the Fed's timetable for tapering QE -- e.g., this intraday item from Bloomberg. However, it's the timetable for backing down on the zero interest rate policy (ZIRP, the 0%-0.25% Fed funds rate) that will be the more compelling driver for the markets and the economy.