Why Interest Rates Won’t Rise In 2015 [iShares Barclays 20+ Yr Treas.Bond (ETF), ProShares UltraShort Lehman 20+ Yr(ETF)]

ratesSteve Mauzy: Rising interest rates and fixed-income opportunities aren’t a given in 2015. 

Everyone is sure the Federal Reserve will raise interest rates this year. Then again, everyone was sure the Fed would raise interest rates in 2014. It didn’t happen.

interest-rates

To be sure, the Fed could move to raise the federal funds rate. The federal funds rate is currently near zero, as it has been for the past five years. The fed fund rate matters because it is a base rate that governs commercial and consumer lending.

But as we’ve seen in these early days of 2015, interest rates continue to fall. This is despite the amplified chatter that the Fed will surely lift the fed funds rate this year.  As I write, the yield on the 10-year U.S. Treasury note is 1.92%. Over the past month the yield has dropped more than 30 basis points.

The problem for the Fed is there are forces at work to keep interest rates low.

Though the U.S. economy has produced new jobs at a monthly rate of 200,000+ through 2014, the economy still wobbles from the 2008-2009 recession. The Fed frequently mentions “pockets of weakness” in its meeting minutes. Fed Chair Janet Yellen remains cautious, highlighting the need for the Fed to remain “accommodating.”

Consumer-price inflation is the primary reason I don’t expect rates to rise in the near future. Falling oil prices in the fourth quarter of 2014 ensure inflation risk remains muted. Consumer-price inflation remains below 2% in the United States, and will likely remain below 2% through the first half of 2015.

Meanwhile in Europe, deflation, not inflation, is the great concern.

The European Central Bank (ECB) recently admitted that inflation numbers will spend a large part of 2015 in negative territory. Eurozone inflation, 2% at the beginning of 2013, has steadily drifted lower since. Consumer-price inflation has been below 1% for all of 2014.

A dip into deflation is all but guaranteed for the European Union. Spain’s inflation numbers reveal the impact of tumbling oil prices. Consumer prices dropped 1.1% over the past 12 months, the fastest drop in five years, and far faster than analysts expected.

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