Bond Rate Forecast for 2016

What will happen to bonds in 2016?

Next year may be a bumpy ride for fixed income. In 2016, the drivers of volatility will be the Fed and the economy.

“We are expecting a lot of uncertainty around the path of rates and when the Fed will hike rates (again),” says George Rusnak, co-head of global fixed income at the Wells Fargo Investment Institute.

He forecasts that 10-year U.S. Treasury notes will end 2016 from 2.5% to 2.75% after hitting 2.24% in late December 2015.

He expects a flattening of the yield curve, with the 30-year Treasury ending 2016 around 3% to 3.5% after reaching 2.95% in December 2015. The Treasury yield curve shows the yield on the most recent issuances of Treasury bills, notes and bonds.

Greg McBride, CFA, Bankrate’s chief financial analyst, also predicts further flattening, with the yield on the 1-year T-bill rising to 1.5% by the end of 2016 from 0.66% at the end of 2015.

“Any increases in longer-term rates will be considerably more restrained for much of 2016,” McBride says.

For Donald Cummings, founder and portfolio manager of Blue Haven Capital, the sweet spot for investors is in intermediate maturities. “With the (10-year) at 2.3%, I’m still in the 7- or 8-year maturities. But, if we get to 2.5% or 2.75%, I can go out into the 10-year or 12-year sector because then I’m getting compensated for going out,” he says.

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