Current Long & Short-term Forecast for the US Treasury Bond Market

With current yields on 10-year Treasury bills around 4.7 percent from 5.25 percent in late June, and yields on every other Treasury security, from three-month bills to 30-year bonds, are trading below the funds rate. This is what is known as an "inverted yield curve," which historically has forecast tougher times ahead.

Since investors are predicting a weak outlook for the economy in the year ahead, they are trying to do something about it before trouble really sets in. Today's investors seem to be betting that the Fed will start cutting rates in next year's first quarter in order to breathe some life back into the economy. The Fed Funds futures contract has entirely priced out a Fed tightening for the rest of this year and trades as if there is a 19 percent chance of a rate cut at the Jan. 31 Fed meeting and a 50 percent chance of easing by March.

We see the one year, short term bond market dipping a little in the beginning of 2007 and coming back up to current rates in a year. In the long run Bond Rates we project to increase due to our projected rise of interest rates. We see project a long term rise of interest rates rise slightly in order to combat a moderately rising inflation rate. This will obviously lead to a decrease in bond prices, however, increase demand of the overall bond market. There are many factors that contribute to this outlook. The main factors include the decrease in unemployment rate, a large increase in demand on housing market due to the demand for retirement housing by the baby boomers, increased labor productivity, and rising energy and healthcare costs which companies will pass on to the consumer. We see an overall decrease in GDP due to competition with the developing world economy; however, there will not be a large decrease in GDP because the US will still receive a benefit from the growth of the global economy. For all of these US will experience increased inflation which will be combated by the Fed with increased interest rates.

4 Year Outlook
Forecast: 6 Month Treasury Note: 6.2%
Forecast: 5 Year Treasury Note: 6.5%
Forecast: 10 Year Treasury Note: 6.8%