Dec 12 2005 - The Interest Rate Outlook: The 10-year and other Treasury yield charts are linked off the Charts and Data listing.  Longer term charts are linked to the listings below. 

10 year yields are holding near 4.5% after trading in a 25 bp range (4.4% - 4.65%) over the last month.  Tuesday's Fed policy announcement is likely to swing the market as expectations for a change in the statement wording mounts after viewing the minutes from the Nov meeting.  Wording suggesting a slowing in the policy tightening will push yields lower.  Thursday's CPI is expected to show the largest decline in over a decade after the 25 year energy related surge in Sept.  Reduced inflation expectations tied to the reverse in gasoline prices and muted unit labor costs provide a downward force on yields.  Plenty of other key economic releases could provide a surprise but we expect a downward direction for yields over the week.

The outlook for long term yields in the quarter ahead includes increased upward pressure from pricing pressures, strong economic growth and Fed tightening.  The inflation outlook includes a ride higher for core CPI through mid 2006 as the higher post-hurricane energy prices risk a lagged breakout higher in core inflation.  The strong economy and Fed tightening will lead to moderately higher long term yields.   10-year yields may end the year in a moderate 4.6% - 4.7% range as the funds policy rate rides higher to 4.25% at the Dec FOMC meeting.  A 5% 10-year yeild may wait for mid 2006.   Tremendous foreign buying in the Treasury market has left a large drag on long term yields which a recent Fed paper estimated at a 150 bp.  When and by what amount that global demand cools off is the key uncertainty to the long term yield outlook.

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