In 2017, the Fed and the economy are the big unknowns.
“People seem to think the Fed’s going to do three rate hikes,” McBride says. “But don’t start carving that in stone just yet.”
Still, the prospect of fiscal stimulus and tax cuts by Trump has convinced investors to stick with riskier assets such as stocks, as interest has waned in safe-haven investment (like bonds). Even before Trump was elected, bond yields jumped as prices fell.
Slipping bond prices are more of a problem with long-term bonds. “Even a modest increase (in rates) gives investors a drubbing” since long-term bonds have more interest-rate sensitivity, says McBride, who predicts further flattening of the yield curve, with the 10-year Treasury ending 2017 around 2.75 percent after hitting 2.57 percent in December 2016.
The yield curve charts the annual interest rates paid on bonds of various maturities, typically ranging from a month to 30 years. The flat yield curve is one in which there is little difference between short-term and long-term rates for bonds of the same credit quality.
In addition, the end of next year could see the one-year Treasury yield at 1.45 percent from its current 0.9 percent.
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