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Prediction #3: Interest Rates are Going Up!

Five Predictions for 2014

Prediction #3: Interest rates are going up!

If the Fed is serious about tapering and the economy is going to progress positively, there is no question that rates are going to nudge up. My estimate is 100 to 125 basis points (1 to 1.25 percentage points) for the interest rate proxy 10-year treasury note.

In 2010, 23.5% of household financial assets were in bonds; toda...y it is hovering around 19%. The postwar mean is 14%. We are still shrugging off the 2008 Great Recession flight-to-fixed-income hangover. Moreover, with the robust equities markets' performances in 2013, many retail investors will want to jump in during the 9th inning, shifting from money market and fixed income products to equities.

100 billion went into bond funds during the first four months of 2013; 95 million came out during the balance of the year....there is no appetite for low interest rate bonds. Support for bonds will continue to wane. Lack of demand should bump up the rates marginally...not to mention all of the deficit building we are adroitly accomplishing on behalf of our children and grandchildren and even their children.

Implications: slower housing markets, mortgage markets, consumer durables growth, and GDP growth (see Prediction #1).

Caveat #1: The Fed has stated it has every intention of holding short-term rates at 0% -- but the yield curve could continue to steepen to the point the Fed breaks.

Caveat #2: I have been completely wrong on interest rate movements 13 of the past 15 years. If the goofballs in Washington do not interfere with the interaction of demand and supply for money, I believe strongly I will be right in 2014 -- but the smart money should probably bet against me.


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