August 18, 2014

Bond price 2014 update and predictions

Due to a change in outlook, I have reduced my large short bond exposure.

The yield on the U.S. 10-year Treasury note closed at 3.03% on Dec. 31, 2013.

As mentioned in my "15 Surprises for 2014," I started the year with an outside-of-consensus view that the bond yields would decline for all of the year, trading in a range of between 2.50% and 3.00%. 

My view was predicated on my projection that domestic real GDP growth would be well below expectations, at about 1.75% (or almost half that of the consensus), and that global growth would only rise by about 3%.

The 10-year yield has steadily dropped throughout 2014 and now stands at 2.395%, slightly below the lower end of my anticipated range, as signs of slowing global economic growth continue to weigh on bond yields around the world.

I had previously expected the 10-year U.S. note to close the year at around 2.75% to 3.00%. I would now reduce that year-end 2014 forecast to approximately 2.75%. While I still expect rates to rise over the balance of the year and into 2015, the climb in yields will start from a lower level than I anticipated and could descend to a lower yield as well (relative to my previous expectations).

This changed expectation lessens the near-term appeal of my short bond thesis, and I have reduced my large exposure to ProShares Short 20+ Year Treasury  (TBF) . 

As a result of this conclusion, I plan to add to all of my closed-end municipal bond funds on any weakness.