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Forecasting Bond Yields and March Madness: Another Broken Crystal Ball

I grew up in Basketball Country (aka The Bluegrass State) and there’s nothing like this time of year.   Four full weeks of college hoops. Conference tournaments and then the NCAA tournament.  And, the tens of millions of tournament bracket submissions filled with predictions about who’s going to win and advance round by round.

These are always fun and add to the spectacle of college hoops and the ribbings and banter among friends.   I love it!

As far as I know, no one has ever picked a perfect bracket.  But, some have been perfect through several rounds.1,2


So, what does March Madness have to do with forecasting bond yields?

Whether it's March Madness or bond yields, they are just like every other crystal ball event in life—based on some false belief that someone somewhere knows for certain what’s going to happen.

Predicting each round of the tournament requires extrapolating what is known (e.g., wins, losses, quality of competition, potential NBA draft picks) and then making assumptions about what’s going to happen in the future.  Going into the tournament, we know that one of the 66 teams is going to win the championship.  We just have to guess which one.

(You’ve likely heard the phrase about what assumptions make out of you and me).

Similarly, predicting future Fed rate hikes requires forecasters do the same thing.   In the current environment with historically low interest rates, what we know for certain is that at some point in the future, the Fed will raise rates.  The trick and the key, however, are determining when.

Lower than expected bond yields have been the big surprise for the last four years.

Conventional wisdom suggested that the ending of the Fed’s second round of Quantitative Easing (QE) in 2011, the U.S. would experience rising interests and bond yields.

(In case you are wondering, QE easing was an unconventional monetary policy where the Fed purchased government or other securities from the market in order to lower interest rates and increase the money supply, and therefore stimulate increased lending and liquidity).

Just as QE depressed bond yields, it was widely assumed by forecasters that the end of QE would bring bond yields back up to “normal,” pre-QE levels.

For example, on March 2, 2011, Bill Gross, co-founder of PIMCO and former manager of PIMCO's $270 billion Total Return Fund (PTTRX) predicted that with the end of QE2, bond yields were likely to go "higher, maybe even much higher."

Let’s see what has actually happened.

The chart below is a plot of the 10-year U.S. Treasury Bond yields from Jan 2008 - Feb 4, 2016.  The chart also plots the average of economists’ forecasts from the Wall Street Journal over five periods from Nov 2011 to Dec 2015.

Bond yield forecasts from the Wall Street Journal, Nov 2011 to Dec 2015


  • The blue dashed line is the forecasts from Nov 2011.
  • The purple dashed line is Jan 2014.
  • The orange is Sept 2014.
  • The green is Jan 2015.
  • The final red line is Dec 2015.
  • The triangles, diamonds, dots and the like indicate where forecasters predicted where interests would be over time.

In each case, we see the forecasters area predicting higher rates, but this didn’t happen.

In fact, bond yields have been declining because inflation has remained more subdued than even the Fed had been predicting.   Moreover, demand for U.S. bonds has been heavy in the face of declining net new U.S. issues.

Where yields go from here depends on the inflation data and supply and demand for bonds.

But who can predict those?

Just like everything else in life based on predicting the future, there is a much higher probability of being wrong more frequently than being right once.   In the case of predicting the future, it is like a game of chance, but with unlimited inputs and endless possibilities.


1 ESPN. Autistic teen picks perfect bracket, March 23, 2010.
2 ESPN. Perfect run ends with Arizona win, March 21, 2105


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