Overestimating Yields

Surveys by Bloomberg show the consensus has a track record of overestimating yields after the Fed cut its benchmark interest rate to virtually zero in 2008 to bolster the economy in the wake of the demise of Lehman Brothers Holdings Inc. and the collapse of the housing market.

Quarterly forecasts for 10-year yields made 12 months forward have overshot market outcomes by an average of 0.68 percentage point since January 2009. That’s because the consensus expected the Fed’s actions to result in more spending and inflation, as has historically happened when the central bank eased monetary policy.

“The market has assumed for the past couple of years that you’d see a pattern like we had in the past, so you have this expectation of higher rates,” Priscilla Hancock, a global fixed-income strategist with J.P. Morgan Asset Management in New York, said in a June 25 interview.

The asset-management arm of the biggest investment bank by revenue has lowered its year-end forecast for the 10-year yield to 3 percent from 3.5 percent.

Quicker Growth

Anticipated bond losses have been pinned to signs of faster economic growth that would allow the Fed to stop buying Treasuries and mortgage securities as a means of injecting cash into the financial system and eventually raise rates.

The Labor Department’s June 6 report showed nonfarm payrolls grew in May to above the pre-recession peak. Less than two weeks later, the consumer price index for May increased 2.1 percent from a year earlier, the biggest jump since 2012.

Other data reveal the uneven nature of the recovery. The so-called participation rate, which shows the share of working- age people in the labor force, held at 62.8 percent in May, matching the lowest since March 1978. Wages and salaries have increased 2.5 percent year-over-year on average since the recession, compared with 4.3 percent in the previous expansion.

Aging Population

An aging population, less spending, slower inflation and greater demand for low-risk, income-producing investments, will keep yields low for years to come, according to Jeffrey Gundlach, the star fixed-income manager at Doubleline Capital LP in Los Angeles whose mutual fund beat 96 percent of its rivals the past three years.