Financial markets have begun to price in the possibility that the U.S. Federal Reserve (Fed) will reduce, or taper, its purchases of U.S. Treasury and mortgage-backed debt. On the surface, one would expect that a very large purchaser of U.S. Treasuries stepping back from that market would lessen demand, cause prices to slip, and yields to rise. Indeed, long-term U.S. interest rates have again begun to move higher. We think that these interest rates will continue to move higher over the coming 12-18 months in fits and starts.
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