From the December/January 2013 issue of Futures Magazine • Subscribe!

Up or down? Interest rate outlook could be either or both

Interest rates are going up, say some traders, fund managers and analysts. But others say they’ll be going down. Just like the outlook for maintenance of the U.S. Federal Reserve’s freezing of short-term interest rates through mid-2015, the yields and pricing of interest rate futures will be subject to many dynamic forces in the next few months.

The presidential and Congressional elections are now behind us, but with the U.S. fiscal cliff, Europe’s sovereign debt problems and challenging economic conditions both domestically and around the world unresolved, volatility will be the watchword going forward. 

The dynamic forces are driving some traders and analysts to the view that the more than 30-year bull trend in fixed income may be over soon. 

“Our current view on interest rates is bearish based on some recent improvement in our macroeconomic measures coupled with an overvalued U.S. Treasury market,” says Joseph A. Baggett, founder, chief investment officer and portfolio manager for Dix Hills Partners.

Baggett says his company’s research has concluded, and recent experience shows, that neither current non-traditional zero interest rate policies (ZIRP) nor quantitative easing (QE) guarantee a “straight, smooth path” to perpetually lower interest rates. 

“Rather, we would argue that rates will fluctuate over time to reflect changes in market participants’ expectations for the duration and magnitude of QE/ZIRP,” Baggett says. These changes in expectations will be driven by evolving economic conditions in terms of both real growth and inflation, he adds. 

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