Take Wall Street’s forecasts on 10-year Treasury yields—a crucial benchmark—with a big grain of salt.
According to a Thursday note by Torsten Slok, chief international economist for Deutsche Bank, Wall Street analysts have been embarrassingly off the mark when asked to forecast where rates were headed.
He compared the last 15 years worth of forecasts from the Fed’s Survey of Professional Forecasters and the actual path of the 10-year Treasury yield
over the subsequent 12 months. He found that forecasters erred, on average, by 60 basis points, or 0.6 percentage point, to the upside.
Slok says investors can use this cumulative mistake come up with a reasonable estimate of where the 10-year note is headed (see chart below). By this rough process, he says the yield for the 10-year note should be 2.3% in the next 12 months, compared with the consensus estimate of 2.9% from the Fed’s second-quarter survey.
Wall Street has had trouble foreseeing where long-term borrowing rates even within a range of 12 months
Based on recent inflation figures, Slok’s touted forecast method may have merit. Weaker-than-expected consumer price numbers in the last three months have given the bond bulls ammunition against a Federal Reserve that has looked past the “transitory” economic data to tighten monetary policy. Treasury yields tend to move along with the fed-funds rate, the overnight borrowing costs between banks.
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