In the current economic environment, the direction of interest rates is a critical issue for many investors -- especially for retirees. You probably know that you can use the yield curve to forecast the direction of the economy. But, did you know that you can also use the current yield curve to forecast the shape of the yield curve one, two or three years or more in the future? Read on.
The Bond Market's Forecast of Interest Rates 1, 2 & 5 Years From Now
|Market Forecast of Future Yield Curve/ Interest Rates|
In the graph above (click to expand), the heavy black line is the current yield curve (as of June 15, 2012). The other three lines are the yield curves as they are expected to be 1, 2 and 5 years in the future. The shape of the future yield curves was derived directly from the current yield curve. As you can see from the chart, the forecast is for rates to remain depressed, even as they rise gradually over the next five years. Two years from now (the green line), the one-year rate is forecast to be barely above 0.5%; five years from now (the dotted red line), the five-year rate is forecast to still be less than 3%.