\ndiscussing the opportunity of lowering its unemployment rate target below which it could envisage raising the
\nfederal funds rate target. This discussion is probably tied to the behaviour of the Fed funds futures, as they
\nprice in an interest rate hike as early as the end of next year. A few weeks ago, no increase in the Federal
\nfunds was priced in before the start of 2015.<\/p>\n
2.<\/strong> Prospects of a QE3 tapering is weighing on the long end of the curve (currently, purchases by the Federal If one considers real yields, it will be observed that much of the yield curve has clawed its way out of negative It may be the Federal Reserve will succeed in calming the markets in September. However, many of the above
\nReserve \u201ccover\u201d one quarter of TNote, TBond and TIPS issuance). It is not yet totally certain this tapering will
\nget under way in September, but for long-dated issues it matters not greatly whether this tapering begins in
\nSeptember or December: the issue is not \u201cif\u201d but rather \u201cwhen\u201d and \u201chow\u201d. What matters for the market is
\nthat the signal has been given. Currently, investors expect asset purchases by the Federal Reserve to end
\nmid-2014. They will react (positively or negatively) if comments by the Federal Reserve when it announces
\nthe actual tapering do not confirm this timing.<\/p>\n![\"Fed.jpg\"](\"http:\/\/beta.next-finance.net\/wp-content\/uploads\/2013\/08\/Fed.jpg\")
\n![\"FF_Futures.jpg\"](\"http:\/\/beta.next-finance.net\/wp-content\/uploads\/2013\/08\/FF_Futures.jpg\")
<\/p>\n
\nterritory: currently, TIPS maturing in more than 6 years offer positive yields. At the start of the year, only TIPS
\nmaturing in more than 20 years offered positive yields. At the start of 2010, no TIPS maturing in more than 3 years
\noffered negative yields. At the start of 2008, real yields were positive right across the curve (weakest real yields
\nwere around 1%).<\/p>\nThe rise in TNote yields results from the following phenomena:
\n1. In the short term, therefore, prospects of the tapering getting under way.
\n2. Longer term, prospects of a rise in the Federal funds rate target (in principle once the unemployment rate
\nhas pulled back below 6.5% or lower still if the threshold is revised downwards).
\n3. Anticipations of stronger growth (US economy is turning in very honourable performances, especially
\nconsidering the fiscal tightening has reduced growth by around 1pp in 2013 alone).
\n4. And probably, the Federal Reserve\u2019s intention to normalise monetary policy as soon as possible, in other
\nwords once growth is self-sustained or, as Mark Carney would say, once escape velocity has been reached.<\/quote><\/p>\n
\nphenomena are irreversible, save if the improvement in the economy is short-lived and deflation gradually takes hold
\nin the US. What is still not known is their velocity (for one thing, the Federal Reserve has not made firm
\ncommitments regarding its balance sheet policy come mid-2014). There may be some offsetting at flow levels, but it
\ndoes seem that the rise in TNote yields will be a lasting phenomenon. A 3% yield for the 10Y TNote is no longer
\noutlandish, but what awaits tomorrow. As regards the curve, the Federal Reserve\u2019s rhetoric points to a further
\nsteepening (the possibility that the 6.5% unemployment rate threshold could be lowered affords more protection to
\nthe short end than to the long end). The Federal Reserve clearly wants to disassociate the balance sheet policy from
\nthe interest rate policy (i.e. non conventional measures from conventional measures). Indeed this is such that the
\ntwo policies could, in appearance, go their separate ways to a large extent. It is this quasi-divergence of policies that
\ncould lead to a further steepening of the yield curve in the near term.
<\/a>\n\t\t\t<\/div><\/figure>