Long Rate

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Long Rate

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Long rates rose while the short end stayed (nearly) constant, with the three-month (constant maturity) Treasury bill rate staying at the very low 0.
Charles Carlstrom, Federal Reserve Bank of Cleveland; Timothy Fuerst, University of Notre Dame; and Matthias Paustian, Federal Reserve Board, "Targeting Long Rates in a Model with Segmented Markets"
The rise in long rates entails a tightening of financial conditions which is particularly inconvenient for countries still suffering from weak activity.
It is reasonable to expect some volatility in long rates as Fed policy shifts.
But with signs of recovery and inflation above government targets, there were questions about how long rates would remain low.
And if long rates rise far enough, they will continue to pull implied short-term interest rates in 2014 higher - whatever central banks may say in their "forward guidance" about keeping rates on hold.
However, Bernanke hinted that Operation Twist and communication tools, notably forward guidance on how long rates will be kept at ultra-low levels, are the two main instruments at the Fed's disposal.
A well-known principle of finance is that today's long rates are just expected future short rates plus a liquidity premium.
Another foremost possibility emphasized in the literature is irrational expectations of investors as long rates might overreact to movements of expected future short rates (Hardouvelis 1994).
Over the last week, the slope of base rouble curves CCS and IRS increased at the expense of synchronic growth of long rates and the decrease of short rates by 5-7 bpts.
The Elliot Wave/Fibonnacci chart patterns confirm my belief that long rates are headed higher.
Many traders were anticipating no interest rate change from the Fed, but the focus will be on whether there are any indications as to how long rates are likely to remain low?

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