While Federal Reserve policymakers on average forecast that the federal funds rate will rise to 1.25 percent by the end of 2015, fed funds futures traders put the level at 0.5 percent.
For the end of 2016, the policymakers see the fed funds rate at 2.75 percent, compared with 1.5 percent for the traders.
Wesley Sparks, head of U.S. fixed income at U.K. money manager Schroders, says he has never witnessed such a big divergence, according to David Oakley, an investment correspondent for the Financial Times
That "disconnect could lead to one of the biggest sell-offs in bonds for a long time," Oakley writes.
"Bill Eigen, head of absolute return fixed income at JPMorgan Asset Management, warns of a potential bloodbath in bonds next year should the market continue ignoring the warnings of aggressive rate rises that the Fed has clearly signaled."
Eigen has allocated up to 60 percent of his flagship fund to cash and won't shift that to bonds until they correct, according to Oakley.
The 10-year Treasury yield stood at 2.06 percent early Tuesday.
"It is a mug's game trying to predict markets, as the spectacular failure of most bond forecasts this year proved," Oakley notes.
"But with Fed policymakers and the markets so badly out of sync over the path of rates, there has to be a possibility that the bond markets in 2015 will experience a similar collapse to 1994, when yields nearly doubled in value."
The bond market's short-term focus is on what will happen at the Federal Reserve meeting that ends Wednesday.
"People are so focused on how they will change the wording," of the Fed's policy statement, Tom Tucci, head of Treasury trading at CIBC World Markets, told Bloomberg
. "They are data-dependent so they'll probably reinforce that story."
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