If there is consensus about anything in the
bond market it is probably that the bull-run dating
back to the early 1980s is over. The debate now is
primarily about whether bonds are in a coupon
clipping trading range or headed for a bear
market. It would probably take another economic
collapse to rekindle the rally, and few, other than
some perma-bears, see that coming in the
As December was winding down, the
general view in the market was that rates are
headed higher in 2018. With our economists
expecting four interest rate hikes in 2018, the Fed
funds rate will rise to 2.5 per cent. The ten-year
treasury yield is expected to rise to 2.95 per cent.
In Europe, the ECB is expected to hold off raising
rates until 2019, but the ten-year bund yield is
seen rising from 35 basis points to 90 basis points
as the ECB tapers it bond buying program.
These projections have strong support,
however, it is also a fact that analysts, egged on
by the Fed’s dot plots, have been expecting rates
to rise over the next few quarters for years now.
One year ago, expectations were that the ten-year
treasury would yield 3.0 to 3.5 per cent in 2017.
Instead it spent most of the year wrapped around
2.3 per cent.