investing

Bond yields to edge higher in 2015

Barring a miraculous turnaround in the global economy, the forecast for bonds in 2015 is they will slowly rise. That's if the long-awaited rate hike by the Fed materializes.

"My expectation is that the Fed will raise rates twice in quarter-point increments to bring the fed funds rate to 0.5 percent," McBride says.

He gives the central bank even odds that it will increase rates in 2015.

Until higher interest rates come to fruition, bond yields are likely to be range-bound, with the 10-year Treasury yield potentially dipping below 2 percent in a crisis. Or, McBride says, "You could just as likely see a brief move above 3 percent if the Fed missteps or misspeaks along the way." As yields rise, bond prices fall.

The average 10-year Treasury yield was 2.57 percent in 2014, as of Dec. 3. The average one-year Treasury bill yield in 2014 was 0.112 percent. At the end of 2015, McBride anticipates the yield on the 10-year Treasury note will be 2.85 percent; on the one-year note, 0.7 percent.

Treasury yields in 2014 and 2015 forecast

Average yield in 2014*Greg McBride's end of 2015 forecast
1-year Treasury0.112 percent0.7 percent
10-year Treasury2.57 percent2.85 percent

Source: U.S. Treasury, Bankrate.com
*As of Dec. 3, 2014

Herbert Hopwood, president of Hopwood Financial Services in Great Falls, Virginia, expects bond returns to remain flat in 2015. "At best, you're clipping a coupon," Hopwood says. "If rates do go up, you would be looking at negative returns if you are in a bond fund. The longer the maturity, the more you will lose."

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