The US FOMC’s decision to reinvest the proceeds of the Fed’s holdings of maturing agency debt and mortgage-backed securities into longer-term Treasuries triggered another sharp decline in US government bond yields in August. Even though policymakers are only likely to restart large-scale asset purchases if economic conditions deteriorate markedly from where we are now, US interest rates should remain on hold until at least 2013. We think the 10-year Treasury yield will return to, and hover around, 2.5% for the foreseeable future.
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