Economists too bearish on interest rates

Economists tend to be bearish on interest rates, says Jeff Waldman, first vice president of global fixed income at CIBC Asset Management. He manages the Renaissance Short-Term Income Fund.

He points to a specific monthly Bloomberg survey—conducted for the last decade—which forecasts the yields of 10-year U.S. treasuries; there have been 119 surveys in total, and economists have forecasted higher interest rates 97% of the time.

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“If you look back over the last couple of years, there have been some very prominent investors making strong and vocal calls to get out of the bond market, because in their view interest rates were going to rise,” says Waldman.

He adds they missed a huge decline in yields in July of this year, with rates all the way down to a record low of 1.4% for the U.S. 10-year treasury.

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They’re too bearish, in his view, since “the [real] driver of interest rates continues to be this extended period of slow growth and deleveraging, and that’s been our base case scenario now for over two years,” he says. “It’s a fiscal policy issue, not a monetary policy issue.”

Waldman predicts economic levels won’t improve until the extreme indebtedness in Europe and the U.S. gets addressed. As a result, interest rates over the next year will rise or decline only modestly.

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“The Bank of Canada is calling for headwinds to continue…from the recession in Europe, the slowdown of economic growth in China and the fiscal retrenchment in the U.S., so the [Bank] is not as optimistic as they were earlier this year either,” he says.

Additionally, the Canadian dollar has been holding steady.

“That’s anther reason the Bank of Canada is going to avoid increasing interest rates for the next 12 months,” says Waldman.