Scorecard time! In January, I laid out five predictions for 2017's bond market, but the year ended up being a bit different than what I had expected. Let's take a look back and see how I fared and where the surprises are.
Prediction #1: Interest rates will likely continue to go up.
I got this one mostly right. The prediction was that the Federal Reserve (Fed) would raise short-term interest rates twice, and it did in March and June. But it's likely to raise rates again in December, in our view. Even with these hikes, the Fed funds target rate should only reach a range of 1.25-1.50%, still a fairly modest number. Two-year Treasuries, which are closely tied to the Fed funds rate, rose from 1.19% at the end of last year to 1.75% on November 24 (source: Bloomberg, as of 11/24/2017). Higher, but in line with the Fed moves.
What is really interesting is longer-term rates. Despite the Fed's actions, we have seen 10-year and 30-year Treasury rates actually decline over the course of the year. Yields of the 10-year note have fallen by 11 basis points and the 30-year note by 30 basis points (source: Bloomberg, as of 11/24/2017). Bond market geeks refer to this as a "flattening of the yield curve," meaning that shorter-term interest rates rose while longer-term interest rates fell. I had expected that longer-term rates would be held somewhat in check by continued strong overseas demand. I was surprised that longer-term rates didn't just rise a little - they fell altogether.
Prediction #2: The uncertainty of uncertainty is on the rise.
We entered the year with very low levels of market volatility, both in stocks and in bonds. With a new administration coming into office and a number of significant potential changes regarding healthcare and taxes
