Treasury yield forecast?

Are you a subscriber to the online WSJ?

It has economic forecasts from a survey sent to 52 economists every month: LINK.

I used to post it a lot, but I kind of got burned by how bad the projections turned out going into the 2007-08 crisis.

In any case, this is from the survey conducted from February 1-5:

10-yr Yield on UST
Jun 2013, 2.09%
Dec 2013, 2.40%
Jun 2014, 2.74%
Dec 2014, 3.02%
Jun 2015, 3.26%
Dec 2015, 3.59%

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extremely low rates dampening supply

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I'm not sure that applies to the housing market though. It's more something that relates to industrial and consumer lending and genuine corporate business projects--i.e., rising interest rates might unlock "animal spirits" for certain sectors of the economy, but I'm not thinking that housing will be prominent among them.

I would tend to be a little bit bullish on the housing market as well, just because I see some serious momentum being generated there, along with a lack of motivation on the part of the Fed to stop such momentum.

Even if rates rise a little bit like the WSJ projections imply, foreclosure listings and inventory supply have dropped a whole lot over the last couple of years. There really isn't a whole lot of slack there, unless you think people are going to start defaulting again, but like many people have mentioned, lending standards are much higher now, and a lot of deals are done with cash.

Additionally, levels of employment can't get much worse. They're still at basically the same levels they were when the official unemployment rate was 10.0% in the winter of 2009-10. If people ever start finding jobs again (which is a big if given our federal health care liabilities), then that should help pick up any slack from Fed rate hikes.

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I meant for mortgage lending

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Yeah, that's what I meant too.

I support a someone unorthodox theory (but one gaining broader acceptance all the time) that rising interest rates will stimulate increased lending and borrowing in certain industrial sectors, but even I do not think that rate hikes will cause mortgage lenders to expand their activity and risk-taking. It's sort of a separate category, for the very reason that it's seen as a kind of cash cow business (as opposed to genuine engines of productivity growth) to push as hard as possible when rates are super low. It's emblematic of the whole problem with ZIRP--i.e., the financial industry throwing money out to certain asset classes or sectors of the economy (as a sort of minimum risk quasi-arbitrage) that don't really represent true growth prospects.

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NAHB also measured 38% YOY growth for housing starts for the month of January.

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Kind of hard to know what to think about this unless put in the context of where housing starts are now relative to where they were in 2007.

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Are you a subscriber to the online WSJ?

It has economic forecasts from a survey sent to 52 economists every month:

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Seriously, you will do better flipping a coin. Some witty econ professor at a teaching college wrote a letter to the editor along those lines back in the early 90's, I may still have the letter somewhere. The gist of it was that the forecasters couldn't even get the direction right better than a coin flip, much less the actual rate itself.

The best part is that some of these had predictions to two decimal places.

Found the aforementioned letter:

“HEADS I WIN, TAILS YOU LOSE”
Appeared in the Wall St. Journal, August 6, 1996

Your semiannual survey of economists has come and gone (July 1) and I was not included again. This is a shame because I have developed a complex economic model for predicting the yield on the 30-year Treasury bond. Much of the process is proprietary, but I will share some details. I first gather all sorts of economic data, including consumer confidence, nonfarm payroll, the Producers’ Price Index and those all-important commodity prices, with a special emphasis placed on gold, of course. I then contact Eleanor Roosevelt to get her thoughts on the mood of the Federal Reserve. And finally, and this is most important, I reach into my left pocket, pull out a 1993 Canadian penny and flip it.

Astute readers will no doubt argue that my model gets the direction of long-term rates correct only about half of the time. To these cynics I point out that there have been 29 surveys conducted since the Wall Street Journal began asking economists for their 30-year T-bond yield forecasts. The consensus estimate of these highly-paid economists for the 30-year bond has been in the wrong direction in 20 of these 29 surveys. Furthermore, 43 economists have participated in 10 or more surveys. Only 13, or 30%, have gotten the direction correct more than half of the time, with only one economist breaking the 60% barrier.

Interest rate forecasts are most important when the interest rate movements are large, and there is where my model shines. The yield on the 30-year Treasury bond has ended up or down more than 100 basis points during the six-month prediction period on ten occasions. The economists’ consensus forecast (and I use this term loosely) was in the right direction only twice. My model has predicted the right direction, believe it or not, in five of 10 periods.

I will ignore the Journal’s slight and provide my forecast to your readers anyway. The Canadian maple leaf is facing up, suggesting rates will decline. I noticed six economists predicted 30-year rates out to the second decimal place (for example, 7.29% instead of 7.3%). I too have a good sense of humor and therefore predict the yield on the 30-year bond will fall to 6.71%. Readers who desire future forecasts will have to purchase my newsletter.

Kevin Stephenson
Assistant Professor of Economics
Middlebury College
Middlebury, Vermont