One of George’s favorite New Year’s activities was comparing economist interest rate predictions from the first of last year to actual year end rates. He would have enjoyed this year very much. January 2014, most predictions for the 10 year Treasury at year end were in the 3.50-3.75% range. 2014 turned out a little differently, the 10 year peaked at 3.05% on January 2, 2014 and then proceeded to slide to different key technical levels, hitting a low of 1.85% in October, before ending the year at 2.12% and then plunging to as low as 1.87% this week, closing today at 1.97%…. Various reasons for this including global slowdown fears (with the US in a “fitful” recovery), massive quantitative easing, commodity deflation, etc…. Even the Fed’s indication of a timetable including “definite” rate increases in 2015 didn’t scare bond investors as the accompanying statement indicated “patience” and a gradual increase to “normalization” (whatever that is in the age of the “new normal”)…… Yellon predicted interest rising over a three year interval, a slower pace than previously anticipated. This year started with an unexpectedly weak US manufacturing report on Jan 2, followed by anxiety over oil price shock (fears of deflation) which also is affecting credit markets due to massive energy components in both financial derivatives and unrated corporate “junk” bonds. Energy company woes can negatively affect these items which could also hurt credit spreads. That and the return of Greece uncertainty are spurring a flight to quality. ….Stay tuned…. David R. Pascale, Jr.
