Academic research offers strong evidence that the bond market is efficient, and that bond prices and interest rates are not predictable over the short term. This uncertainty is reflected in the often-contradictory interest rate forecasts offered by economists, analysts, and other market watchers.
Even when the experts share similar views on the direction of the economy and credit markets, reality often proves them wrong. Since 2008, pundits have been saying bond yields have to rise sharply and so far they haven’t. The 10-year U.S. Government bond was still yielding less than 2.5% for most of 2013. If we had switched your investments in 2008 because of what the pundits had said, you would have missed out on a lot.
Today’s bond prices already reflect expectations for tomorrow’s business conditions and inflation, and these expectations can change quickly in response to new information. This new information is unknowable. Investors who accept market efficiency should not be surprised when the credit markets foil the experts. If prices were easy to forecast, you should find a host of bond fund managers with market-beating returns, but most of them underperform their respective benchmarks over longer time periods.
Since no one has a reliable method for determining whether interest rates will rise or fall in the near future, investors should avoid making fixed income decisions based on a forecast, media coverage, or their own hunches.
