Against the Herd: Lower, Not Higher, Rates in 2014

NEW YORK (ETF Expert) -- Bloomberg News surveyed banks and securities companies on where the 10-year Treasury yield would finish 2014. Economist forecasts averaged 3.41%. With 2013 closing near 3.01%, perceived strength in the underlying U.S. economy, and the Federal Reserve reining in its controversial bond buying program ("QE3″), the predictions are hardly outlandish.

On the other hand, where in the media will you find bond bulls who believe that interest rates will go significantly lower? Does anyone think that rates could tumble back towards 2%, or even 1.5%, sending bond prices surging back to record highs?

It is worth noting that gains for Treasuries in the first few weeks of January are the strongest that they've been in four years. In fact, income exchage-traded funds of all flavors are seeing capital appreciation and seven of 10 have climbed back above respective long-term (200-day) trendlines; only the three Treasury bond ETFs remain below respective moving averages.

Could Income ETFs Be Signaling Lower Rates Ahead?    
               
          Approx YTD %   Above 200-Day
               
Vanguard Extended Duration (EDV)   4.7%   -3.4%
iShares 20+ Treasury (TLT)     3.0%   -2.4%
PowerShares Preferred (PFF)     2.9%   1.3%
Market Vectors High Yield Muni (HYD)   2.6%   -0.9%
SPDR Barclay Muni (TFI)     1.8%   1.5%
PowerShares Emerging Market Sovereign (PCY) 1.5%   0.0%
iShares 7-10 Year Treasury (IEF)   1.5%   -1.3%
SPDR Barclay High Yield Bond (JNK)   0.7%   3.6%
PIMCO 0-5 Year High Yield Corp (HYS)   0.4%   3.4%
PowerShares Senior Bank Loan (BKLN)   0.4%   1.8%
               
S&P 500 SPDR Trust (SPY)     -0.3%   9.6%
               

Perhaps ironically, the gains for income ETFs in the first part of 2010 is eerily reminiscent of the way that the bond markets anticipated the end of the first round of quantitative easing ("QE1″) six months in advance.

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