When Will the Fed Start Raising Rates?

Whenever a major event like QE2 occurs, I like to look at how the implied forward yield curves change. A good futures contract to use is the CME Eurodollar futures which are basically the forward LIBOR rate assumptions. Here is some current data from ino.com:

Date Implied 3moLIBOR
December 2011 0.495
December 2012 0.895
December 2013 1.65
December 2014 2.555
December 2015 3.36
December 2016 3.955

The Fed Funds rate is usually about 30 to 40 basis points below the Libor rate, so based on the above quotes, the market is predicting the Fed won’t start raising rates until late 2012.  Even in 2016, the market estimate is a Fed funds rate well below 4%.

If the market estimate is correct, high quality closed-end bond funds that use leverage may continue to perform reasonably well for at least the next year or two.

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