Is 2015 The Year For Rising Interest Rates? [ProShares UltraShort Lehman 20+ Yr(ETF), iShares Barclays 20+ Yr Treas.Bond (ETF)]

The net impact I expect is to have stable to rising longer term interest rates, and rising short term interest rates. Bond investors refer to this as a “flattening”; the slope of the yield curve is getting flatter as the short end rises more than the long end. This turns out to be a very common occurrence during Fed tightening cycles. Here we can see what happened with the steepness of the yield curve and the Fed Funds rate during the last rate hikes in 2004-2006:

yieldcurve

We saw the beginning of this flattening in 2014 as the yield difference between two- and 10 year Treasury rates decreased by 1.14%, from 2.64% to 1.50%. As the yield curve flattens, I would expect this spread to continue to narrow.

So, will 2015 finally be the year for higher interest rates? Kind of. Short term interest rates are likely to rise, driven by the Fed. Longer term rates will likely move up, but not a significant amount. The key for investors is that they will need to be more precise when talking about interest rates. Saying “rates will rise” is no longer sufficient; it is important to be specific about the interest rate. Overall for 2015, an investor’s location on the curve will be what matters.

Matthew Tucker, CFA, is the iShares Head of Fixed Income Strategy and a regular contributor to The Blog. You can find more of his posts here.

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