The recent sell-off in bonds seems to indicate the markets have already priced in a first hike in the fed funds rate as early as December. While the Fed’s tendency will be that of starting to normalize policy rates — as it passively approaches a gradual unwinding of QE — a beginning of rate hikes any time this year may be premature. The chart below indicates economists forecast a 2009 Fed target rate of 0-0.25, with increase seen late in 2010.
Economists expect the yield on the 10-year US Treasury to reach 4.40% by Dec. 2010. The 10-T yield is now at 3.9%. On fair value basis, the tape should probably print around 3.0%, 3.1%.