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Treasuries come under fire

The surge in US Treasury yields in December was prompted largely by the announcement of further fiscal stimulus, which nurtured expectations of economic growth; increased anxiety about the budget deficit; and reduced the (perceived) onus on the Fed to increase its asset purchases and keep rates exceptionally low. The rise in nominal yields was driven primarily by an increase in real yields, although inflation expectations also rose. We now think 10-year nominal Treasury yields are likely to stay somewhere around 3.5% in the first half of 2011, but then fall back to 2.5% later in the year.

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