Advisors who have been counseling investors to prepare for rising rates and rising inflation may want to revisit those expectations. Despite forecasts for higher rates following the U.S. presidential election, the yield on the 10-year Treasury today is the same as the yield in mid-November, before two Fed rate hikes, the last CPI report showed prices falling for the first time in more than a year and crude oil prices have slipped below $50 a barrel.
(Related on ThinkAdvisor: Fed's Fischer Says Two More 2017 Hikes Still Feels Right)
The paradigm shift in the bond market that many strategists have been expecting since even before the election of Donald Trump as president has not taken hold.
(Related on ThinkAdvisor: Trump's Election Fuels 'Paradigm Shift' in Bond Yields, Inflation Outlook)
The Fed is still expected to raise rates later this year – a point that its Vice Chair Stanley Fischer reinforced on Friday – but even those expectations have softened. The CME's FedWatch tool, which measures market expectations for Fed rate hikes, is now showing odds of less than 50% for a rate hike in June.
Investors may also remember that Fed officials had forecast four hikes for 2015 and 2016 but raised rates only once in each of those years.
"There's still a greater risk of deflation than reflation," says Gary Shilling, founder and president of A. Gary Shilling & Co., an economic research and money management firm. Less inflation means less reason for the Fed to raise rates.
"The initial reaction to the election was a rally in oil, the U.S. dollar and stocks including emerging market stocks. But Trump hasn't gotten anything through Congress on tax cuts or deregulation yet, and infrastructure projects take years."
(Related on ThinkAdvisor: Trump's Tax Plans Coming Next Week, White House Official Says)
In an interview with The Associated Press on Friday, the president said he plans to unveil his plan to cut personal and business taxes on "Wednesday or shortly thereafter," just before marking his first 100 days in office.
