Interest Rate Forecasting – Mere Mortals Need Not Apply

“Bye-bye, buy bonds,

Love ya’, love ya’ madly.”

Gene “By Golly” Barry sign-off, WING (Dayton, c. 1961)

The great Gene Barry, Dayton DJ par excellence, had simple, straightforward U.S. Savings Bonds in mind when he used to end his show in the 60s. Since then, the bond market, of course, has become much more complex in terms of both bond issuer and the securities being issued. A lot has changed, but one aspect of bond market investing has stayed the same over the last 60 years: Attempts by bond markets investors to forecast interest rate behavior have remained exercises in futility. If one could make such forecasts successfully, as the old saying goes, he/she would be famous (and rich) by Wednesday; but, no one could do it in Gene Barry’s day, and no one can do it now. The most recent proof?

“Yield Dive Catches Forecasters Off Guard” was the bold, in-your-face headline in the June 10 edition of the Wall Street Journal. Of course “forecasters” were caught off guard. They were caught off guard because just about every learned soul in all those high-rise office towers and ivory towers knew that interest rates were going up in 2019. Beware of unanimity, as we like to say. Once again, the consensus was all wrong, and rates have plunged in 2019. The yield on a Treasury note maturing in 10 years has gone from the 2.68% of New Year’s Eve to the 2.03% of last Friday (June 21), with a resultant year-to-date total investment return of almost 8%. How far off were all of these learned souls? The chart on the next page accompanied the WSJ article, and tells the story. The straight lines at the top represent the responses of over 50 economists polled late last year for their 2019 interest rates forecasts. The solid line is what actually has happened in 2019.

In the words of (Good) Will Hunting, “How da’ ya’ like them apples?” As we have stated many, many times, attempts to forecast the capital markets in general and interest rate behavior in particular are futile exercises. There simply are too many variables of everchanging importance involved. We mere mortals, no matter how much computing power we have on hand, don’t stand a chance.

What’s the answer? There is no one right answer, but we employ a pretty good one for the U.S. Fixed Income sector of our TPM balanced portfolios. We utilize the services of three active bond managers, each with a certain sub-specialty, and also invest in the shares of an intermediate-term Treasury ETF. This four-part combo has stood the test of time. To be more precise, we continually have challenged the combo, and its performance has surpassed that of the popular bond market benchmarks consistently. We do like them apples.

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Research is the lifeblood of any investment firm, and we routinely promise that 15% or so of every client’s management fee is devoted to research. The assumption – and it’s a heathy assumption – is that everything we do should be subject to continual review and analysis and that there always is a better way to invest our clients’ assets. But, change is infrequent because everything we do is supported by a great deal of historical data, which constitute a high bar. Despite numerous reviews and analyses, the investment process in TPM’s U.S. Fixed Income sector remains the same because that process rests upon a very solid foundation: Correctly forecasting interest rate behavior may be the path to performance heaven; but, no one can do it, and a very good alternative (the one we utilize) exists.

So, we recommend following Gene Barry’s advice – after all, bonds stabilize investment returns and provide sanctuary in times of stock market stress. But, basing everything on an interest rate forecast? Just remember that WSJ chart.

Have a Happy Summer (if it ever stops raining), and please contact us if you have any questions.

Doug, Jeff, Lindsay, and Beth