Research Outlook 2007 Economy Stocks International Bonds Market Studies Research team Download Economic Outlook Summary Booklet

Interest Rates

POSITIVES

Inflation becoming manageable

Housing points to further economic trouble

Washington gridlock good for bonds                        

NEGATIVES

Falling dollar makes U.S. bonds less attractive

Junk bonds are flooding markets

Some mortgage bonds have credit risk

Typically, the pre-election year is poor for bond investors.  However, 2007 is NOT a typical pre-election year.  Government spending will likely be more curtailed under a divided government than under a united front.  Less spending could translate into fewer new Treasury bonds flooding the market.  This will prove advantageous for bond investors. 

Inflation is apt to moderate, additional good news for bonds.  Money supply has turned negative and wages remain contained.  Further, commodity prices have cooled off from their excessive highs.  Investors should demand high quality.

One troubling area is the quality levels of the bond market.  Today, nearly one-third of the corporate bond arena is labeled high-yield or “junk”.  Given the growing pinch being felt on adjustable-rate mortgage and interest-only borrowers some mortgage-bonds may also lag. 

Overall, we should see a bull market for high quality, longer-term bonds in 2007.