Forecasting interest rates is an important exercise for any portfolio manager or investment strategist. The future direction of interest rates dictates the future prices of bonds and the equilibrium of cash flows between the two major asset classes - bonds and stocks. Central banks around the world gather periodically to assess their respective inflationary pressures and employment statistics. Reading the interest rate tea leaves seems difficult - at best! Bond Market Structure There are two main levers to consider when we think about the bond market - credit risk and duration risk. Credit risk is the estimate of how likely we (as investors) will get our interest payments on time and the probability of recovering our principle at the end of the bond term. Credit risks can range from very low (AAA rated) to very high (DDD rated). Duration risk is the estimate of how much a bond price will change between its birth date and its termination date. Shorter duration bonds will have lower risk