The recent rise in the yields of US Treasuries can largely be attributed to the rebound in the price of oil, which has led to an increase in “inflation compensation”.The rise in the price of oil has been sufficient to assuage concerns about deflation in the US without endangering the recovery in its economy. The rise has therefore made it less incumbent upon monetary policymakers to tread exceptionally carefully. Against this backdrop, investors have begun to reconsider how rapidly the federal funds rate is likely to be raised in the coming years. Nonetheless, there is still a large wedge between forecast of where that rate will be at the end of next year (a range of 2.75-3.0%) and the instantaneous short-term rate implied by overnight indexed swap rates at that point in time (around 1.0-1.25%). Accordingly, the yield of conventional 10-year Treasuries will continue to increase – Capital Economics end-2016 forecast is 3.0%. Their forecast is that the price of Brent crude will end next year at $65 per barrel, which is close to its current level.
The material has been provided by InstaForex Company – www.instaforex.com