This Is a Tough Environment to Forecast Rates

This has been a difficult year to prognosticate interest rates. Not only has direction been somewhat difficult, but the magnitude of each move has been stunning, relative to the data. Virtually every professional investor I talk to has struggled with rates at least at some point this year. Sadly, as the summer ends, rates are still playing a major role in equity prices but have become no easier to forecast. To some extent there are just too many key drivers. Jobs The job report in the U.S. last Friday was nothing short of spectacular. You would have to dig deep into the data to find something to nitpick about. But rates were contained, as this data was clearly backward looking, with the delta variant delaying a lot of reopening plans (at least for large corporations). I expect that as schools open and additional COVID-related benefits run out, we will continue to see good job numbers, which isn't being priced into the bond market. The Fed and Yellen Not only are we seeing mixed messages from various Fed speakers, which is either an indication of real dissension within the Fed or is an elaborate game to keep rates in a narrow band, but we see Yellen taking a more prominent role in relation to the Fed than any prior Treasury Secretary. This is a dynamic the bond market is struggling to adapt to, as it would appear to make the Fed more responsive to politics than we are used to seeing. This dynamic is so difficult and so new and is why so many traditional methods of anticipating the Fed are not working. Stimulus and Policy D.C. was supposed to bring on wave after wave of infrastructure spending and policies to boost the economy. Infrastructure, so far, is largely a bust. Even if the current deal gets done, the headline number overstates the amount being spent, as some is just re-allocating money already allocated during COVID -- but not used. It is also full of pet projects that seem unlikely to really ignite the economy. While a bit off the radar screen, the fact that Aon pulled back from its proposed merger with Willis Towers Watson is making many people take a closer look at the Federal Trade Commission composition. That could slow M&A activity, which has been an engine for stock market growth -- and that, in turn, also tends to add supply to the bond market. So earlier this year, the bond market was bracing for massive debt issuance -- and now that fear has largely dissipated as D.C. is not delivering. Inflation A topic for another day, but consensus is saying inflation is transitory and has a long runway -- despite so much evidence, including wage growth and companies stating in their calls that they can pass on costs to the consumer. I'm betting on more inflation for longer, and the market isn't. COVID The delta variant, and an increasing fear of yet unknown variants, has changed the landscape. So far, hospitalizations and deaths remain low, but companies are starting to change their return-to-office policy. There is starting to be a sense of foreboding and here we go again, which will hurt growth and keep rates low. I, for one, do not expect D.C. to deliver a big stimulus bill if COVID surges again, because there are so many unanswered questions about how the previous stimulus money was used (who benefitted and what it did for the economy). On top of that, this debate, if we get there, will have a blame element, as there will be discussions about being vaccinated versus not being vaccinated. I'd be shocked to get a good band-aid solution from D.C. this time around, which would weigh on stocks as well as bonds. More Questions Than Answers I'm betting rates edge higher, but not by much and am doing everything I can to figure out which way all these questions resolve themselves. I'd be lying if I said this was an easy time to make a call in the rates market. That is especially true, since there is a lack of depth to liquidity, which is making every move bigger than it should be. I wish I could have more conviction, but I am watching very closely. One thing that I do think is happening is that lower yields won't help stocks much, because just like March of last year, we are hitting a point that lower yields mean the economy is slowing faster than the Fed or policymakers can react.

This Is a Tough Environment to Forecast Rates

With so many questions around inflation, COVID, the Fed, and stimulus and policy, it's hard to determine what will happen in the rates market. Here's my take.

Columnist Conversation

Very Cautious

This Weekend on Real Money

AAP Podcast on the Fed Decision!

COLUMNIST TWEETS

Please Join or Log In to manage and receive alerts.