Digging Deeper on Interest Rates
Given the Federal Reserve's new guidance -- that it will keep short-term interest rates low until mid-2015 --- what are the implications for the pricing of U.S. Treasury bonds? Digging deeper, what is the so-called Evans Rule, and what does it tell us about the odds of rate hikes in 2015?
There are several methods that one can use to break down long-term bond prices. But one of the simplest is to assume that the long-term bond prices are simply a function of a series of short-term bond prices, summed up over time. Put another way, buying a five-year bond today should produce the same return as would buying a three-month bond and reinvesting every quarter for the next five years. Obviously there is uncertainty about the future path of short-term bond rates, but given that the Fed is now publishing the Federal Open Market Committee's views on future short-term bond rates, we can at least make some approximations....772 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.
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