A recent article in Bloomberg noted that “Bond Traders Uncover Secret to Rates That Fed Doesn’t Get.”
Everybody always wants to know when rates are going to move. Over my career, I could’t begin to guess how many times I have heard a variation on that question. Certainly there are trends and seasons to movements in interest rates, but there are just too many variables to be able to forecast rates with precision. In Congressional testimony, even Alan Greenspan tried to to explain the difficulty to members of the House Committee on Financial Services,
I think forecasting markets is very difficult, I would argue at the end of the day, probably with rare exceptions, almost impossible. But what you can do is measure the risks. And the risks essentially are different from somebody who is 30 years old and is saving for retirement or one who is 55. And I think those types of judgments are crucial and important for appropriate investment policies for retirement, and I don’t think you can generalize very far down the road. (Alan Greenspan, speaking as Chairman of the Federal Reserve, April 30, 2003.)
Even recently, details from the March meeting of the FOMC reveal the differences in opinions among the voting members about where Fed Funds rates will be in the near future. (See chart, above.)
There are so many variables at work, forecasting rates with precision is not realistic. Yet waiting for higher rates remains very popular. However, by underallocating to bonds, investors may unwittingly be taking on more risk by missing out on the diversification benefits of holding bonds with their stocks. We believe it is unwise to try to time interest rates, and suggest instead to mitigate the risks of a rising rate environment by adjusting within fixed income (which specific investments you own), rather than shifting your asset allocation. For investors, use your investment policy to determine your asset allocation. Your market view should affect which investments you select–not whether or not you remain invested. Click here to read more about timing rates.