Treasury bonds: Victim of Fed rate hikes
Treasuries this year confounded most prognosticators, who anticipated yields would rise as the Federal Reserve tapered its quantitative easing and economic growth strengthened. But the Fed's low interest rate policy continued to depress yields.
The consensus among analysts is that the central bank will begin increasing interest rates around the middle of 2015 and that's bad news for Treasuries, which have rallied since 1981. "The Fed will finally raise rates, or there will be anticipation of a rate rise," Solaris' Ghriskey says. "Has the world been wrong for a long time (in predicting higher yields)? Yes, but it's inevitable."
The average forecast of Fed policymakers is that the central bank's federal funds rate target will end next year at 1.27 percent, up from zero to 0.25 percent currently, according to Convergex's Colas.
"I think the Fed is true to its word," he says. "And if it goes to 1.27 percent, there's no way the 10-year Treasury yield stays around 2.35 percent."
The yield stood at 2.33 percent on Nov. 14, and Colas predicted it will rise to 3 to 3.25 percent next year. But he injects a note of caution.
"To call an end to a rally of that kind of magnitude is spicy, though I think the facts support it," Colas says. Stronger economic growth in the U.S. than in Japan and Europe should draw investors to Treasuries.