Expected Economic Risk

The WSJ economic forecasting survey asks for forecasts of ten-year bond rates. Used in conjunction with the Federal Funds Rate we can get a glimpse into whether market participants foresee the yield curve rising or falling over the coming years. A flatter yield curve can suggest two things, slower future economic growth or decreased economic risk. Two caveats to the analysis below: we only have two points on the yield curve and forecasts for bond rates exhibit a lot of variation.

With those caveats in mind the graph below depicts the average spread between forecasted ten-year bond rates and the federal funds rate. As the spread gets smaller, the yield curve becomes less steep. Though there is a minor increase forecasted for the end of 2017 the overall trend remain downward.

The flattening of the expected yield curve is mostly driven by increases in the Fed funds rate, which is expected to rise 1.66 percentage points from June 2017 to December 2019, whereas ten-year bonds are only expected to rise 1.11 percentage points over the same timeframe. Market participants do not expect the longer end of the yield curve to respond strongly to Fed action.

To reiterate one of the caveats above, while the average of these forecasters shows a definite trend, we see a fair amount of variability. Fifteen percent of participants who provided all forecasts for both ten-year bonds and the federal funds rate expect the yield curve to become more steep. Even though, the consensus clearly points to lower risk and slower future economic growth, that degree of variation provides enough uncertainty to warrant attention to changes in the expected yield curve.