As President Barack Obama starts his second term, the bond market is already telling him that the administration’s forecasts for economic growth over the next four years are too optimistic.
The Office of Management and Budget predicts yields on 10-year Treasury notes will rise to average 4.1 percent in 2015 and 4.9 percent in 2017 as the economy expands at about a 4 percent rate in the second half of Obama’s term. Bond prices suggest the yield, now at about 2 percent, will average below 3 percent two years from now, implying that gross domestic product will fall short of OMB projections, according to data compiled by Bloomberg.
The gap between rates implied in the future by the so-called yield curve of actively traded securities and the administration’s forecasts may be narrower than just looking at the raw numbers suggests. Demand for government bonds has been elevated by Federal Reserve purchases and new rules requiring banks to buy the safest assets for their reserves, which have depressed the compensation investors demanded for holding longer-term debt.
Yields on 10-year notes are forecast to climb to 2.25 percent by the end of the year, according to the median estimate of 65 respondents in a Bloomberg News survey. The last time rates were above 4.9 percent, the average for 2017 anticipated by the Office of Management and Budget, was in July 2007 as the financial crisis was mounting.
For the three years following the recession that ended in June 2009, the jobless rate averaged 9.2 percent and growth after accounting for inflation averaged 2.3 percent, Robert Pollin, a professor of economics and co-director of the Political Economy Research Institute at the University of Massachusetts at Amherst, said in a telephone interview on Feb. 12. That compares to average unemployment of 6.3 percent and real GDP expansion of 4.5 percent for the three-year periods following the end of the previous eight recessions.
Even if growth doesn’t meet Obama’s forecasts, rising home and car sales show the economy is improving, according to James Smith, chief economist at Parsec Financial in Asheville, North Carolina. His forecast for a 10-year Treasury yield of 4.11 percent at the end of 2013 is the highest in a survey of 64 participants by Bloomberg News.