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Market forecasts

Drew O’Neil discusses fixed income market conditions and offers insight for bond investors.

Correctly timing the market, which requires predicting the future, is difficult at best and realistically is an impossible task to do consistently. So while we hear market forecasts and predictions on a daily basis from market pundits, is it important to keep in mind that no matter how much of an expert this person is or how much experience they have, they are still attempting to predict the future. When considering the fixed income portion of your portfolio that is earmarked for capital preservation, relying on market forecasts can be a recipe for disaster if you are constantly trying to time the market. Actively trading based on predictions and projections with your capital preservation allocation could very well lead to missed opportunities and lost principal. The below charts highlight a few examples of how difficult it is to correctly predict the future.

The first graph shows the consensus estimate for the 10-year Treasury at the start of each year for the next five quarters (red line), based on the Philadelphia Fed’s Survey of Professional Forecasters. The blue line shows what actually happened. Even for some of the brightest economic minds, a task as “simple” as consistently predicting what a single interest rate would do over a 15 month span has proved near impossible.

This next graph shows what the Fed Funds rate was expected to do as of January 1, 2022 according to Bloomberg calculations based on where Fed Funds futures were trading. So, this “forecast” is not based simply on what market pundits are saying, it is based on where securities were actually trading. The accuracy of these predictions is apparent… as of last week, the forecast had missed the mark by over 300 basis points.

When considering investment options, these charts illustrate the difficulty of timing an investment based on a market forecast or prediction. Fortunately, when it comes to purchasing and owning individual bonds, you can see into the future. When you purchase a bond, the timing and amount of all future cash flows are known and are unaffected by market movements (barring a default). The income, coupon cash flow, and date and amount of principal return are locked in… no need to predict the future. While no one can tell you for certain what the future holds, we can look back in time and see that current yields available are at some of the most attractive levels in over a decade. If you have money in your portfolio earmarked for capital preservation, now might be an opportune time to lock in yields at these levels, as no one knows what the future holds.


The author of this material is a Trader in the Fixed Income Department of Raymond James & Associates (RJA), and is not an Analyst. Any opinions expressed may differ from opinions expressed by other departments of RJA, including our Equity Research Department, and are subject to change without notice. The data and information contained herein was obtained from sources considered to be reliable, but RJA does not guarantee its accuracy and/or completeness. Neither the information nor any opinions expressed constitute a solicitation for the purchase or sale of any security referred to herein. This material may include analysis of sectors, securities and/or derivatives that RJA may have positions, long or short, held proprietarily. RJA or its affiliates may execute transactions which may not be consistent with the report’s conclusions. RJA may also have performed investment banking services for the issuers of such securities. Investors should discuss the risks inherent in bonds with their Raymond James Financial Advisor. Risks include, but are not limited to, changes in interest rates, liquidity, credit quality, volatility, and duration. Past performance is no assurance of future results.

Investment products are: not deposits, not FDIC/NCUA insured, not insured by any government agency, not bank guaranteed, subject to risk and may lose value.

To learn more about the risks and rewards of investing in fixed income, access the Securities Industry and Financial Markets Association’s Project Invested website and Investor Guides at www.projectinvested.com/category/investor-guides, FINRA’s Investor section of finra.org, and the Municipal Securities Rulemaking Board’s (MSRB) Electronic Municipal Market Access System (EMMA) at emma.msrb.org.

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