The economy appears to be on the mend. Hiring is picking up and dismissals are on the wane, at least in the private sector. Consumers are feeling more optimistic with the Bloomberg Consumer Comfort Index at a 4-year high. The Federal Reserve is sticking to its support-the-economy policy position. The stock market climbed by 12.59 percent in the first quarter of the year, pushing the S&P 500 index to post-2008 highs. U.S. manufacturing is expanding at a healthy clip. The Institute for Supply Management's factory index climbed to 53.4 in March, up from a 52.4 reading in February. (Measurements above 50 signal growth in manufacturing.)
Of course, the economic progress is highly uneven. Even as manufacturing continues to improve, construction spending fell 1.1 percent in February. The unusually warm weather may have pushed some traditional spring sales, such as car purchases, into the first three months of 2012. The high price of oil and gasoline is weighing on consumers and business. The Euro sovereign debt crisis simply isn't going away. The latest focus of worry is on heavily indebted Spain (with occasional nods to troubled Portugal and Ireland.)
You'll be shocked -- shocked! -- to learn that economists are deeply divided on the outlook.
To get some additional insight, I asked people in the Public Insight Network (PIN), a national database of public radio news listeners, for their interest rates and bond market expectations. Specifically, I wondered if they thought rates would go higher in 2012, their outlook for the bond market and how changes in rates might affect their household and portfolio strategies. I got 36 responses. It isn't a large sample, but it's big enough to be intriguing.
A couple of themes emerged. For one thing, most of the homeowners who responded to the survey had locked in low interest rates. They had insulated their incomes and cash flow from a rise in interest rates whenever it happened.
For another, the interest rate consensus was for no increase to slight increase for 2012. Nothing dramatic. Very muted. There's no sense that the economy will turn gangbusters. At best, the economy will show modest gains.
The response of Barry Meister, a high school science teacher in Grandview, Wash., was typical among those expecting higher rates: "I think that interest rates will slowly rise this year. I think that the 10-year bond will probably be around 2.5 percent by year end and maybe even higher."
The 10-year Treasury bond is currently at 2.19 percent.
Mark Macfaden, a software engineer in San Jose, Calif., also sees a rate rise. "I believe the stock market picks up steam so bond prices will decline after the big run up in fixed income investments. This assumes world events don't shake things up (Iran)."
Economist Ed Yardeni noted in his latest newsletter that, for the past two weeks, Fed Chairman Ben Bernanke has been giving speeches and media interviews with the basic message that "the Fed chairman is committed to keeping the federal funds rate close to zero until his second term as chairman expires on January 31, 2014 even if the economy appears to be improving." Little wonder the Fed played a starring role with the rate-rise skeptics among the respondents.
For instance, Michael Helme, a computer operator and proofreader from Westbury, N.Y., said the "Fed has told us it will continue to hold interest rates low for the next couple of years, and I believe the more risky asset classes in the bond market (corporates, munis, etc.) will only need to pay a little interest than risk-free treasury bonds have to offer."
Mark van Roojen, a philosophy professor from Lincoln, Neb., adds: "The economy is still weak, and given the absence of serious counter-cyclical policies around the world, it seems to me that it will remain weak for some time to come. So I expect the Federal Reserve to keep interest rates low for the next several years."
On the investment side, it was striking that a rise in rates -- if it did happen -- would affect portfolio strategy. Perhaps the calmness reflects the belief that rates aren't going up much, if at all. But the answers seem to suggest strategy was more important. Bonds were part of a diversified portfolio. Professor van Roojen said he wouldn't sell his bonds. "Partly why they're there is to balance out riskier stuff. If anything, if rates went up, I might put more of my account into bonds."
James Metzger of Little Rock, Ark., probably captured a popular sentiment about making more money off the safest savings: "The bond fund in my 401(k) would probably tank, but on the other hand, it would be nice to get more than 0.2 percent interest in my credit union accounts."