Following the Lead on Interest Rates Isn’t a Strategy

Wednesday, September 24, 2014 |

Building a portfolio based solely on market consensus or projections isn't a strategy – it’s hope based investing.

Interest rates going up has been the consensus view since 2009. Eventually this view will be right, so far it really hasn’t. When exactly they go up I am unsure of, though I tend to think later than most. 

One thing I will not due is blindly follow market projections or consensus calls, which appear to be nothing more than throwing darts. While the recent Fed statement contains “considerable time” before an interest rate increase, futures markets are assuming this will happen mid 2015:

Note: This chart isn’t easy to read. The blue line shows the actual Fed Funds rate, which is effectively 0 and has been since mid-2009. The orange line shows what the futures market is predicting the rate will be in the future at the start of the line (e.g. when rates reached 0 in mid-2009 futures markets expected rates to rise back up quickly and be at 2.50% or so by mid-2010). Lastly, the green line shows where we currently are that rates are projected to rise in mid-2015 and be at almost 3% by 2017. Also, this chart was printed before the latest Fed Statement and thus futures markets may have adjusted.

What we can observe in the above charts is that market participants always expected the next rate rise to come and it never did. Now markets did get better, projecting the rate rise out further and further, but none the less were still off. 

Will it be mid-2015? Not sure, but even some widely used Fed models project the rate increase will be further out:

What about consensus analyst? Not much better:

                                                                              Source: DoubleLine Funds

As you can see the black line where analysts expect the 10 year to be at year-end. It has consistently moved down all year, along with interest rates. Again, analysts have missed the calls on interest and this has been a reoccurring theme since 2009.

I am not advocating totally ignoring projections (though not a terrible idea I must admit and certainly better than the other extreme – following them religiously), nor am I advocating making your own market calls.

But building a portfolio based solely on market consensus or projections isn’t a strategy – it’s hope based investing. Instead, 1) make probabilistic assessments 2) have a plan if/when those move against you.