The chart below shows market forecasts for short-term rates (3 month LIBOR) over the next three years based on EuroDollar futures contracts. As can be seen, the market is projecting a steady increase in short-term rates with an increase in the pace in mid-2012.
![](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj7PG1CQt6t57rSuFtPQYLdVKCk3O9hprCQ-Gv3IZFhmWMcM2yzakG9TCT2yr60Wa-ttoxLcTEforQfwG5yVUiEWom4GEaX5p3Z_eCkyScDgprJ8bF2mA413SEuLIRVHvBZU1btq40OGw/s800/edoll.png)
Markets have moved from 'Fed on hold for years' to 'Fed on the verge' abruptly since early November. While the chart above shows a snapshot, the chart below shows the trend of what the market is / has priced in for the one year Treasury yield, two years forward (bootstrapped from 3 year and 2 year Treasuries).
Note that current 1 year Treasuries are 0.27%, while the forward rate has jumped ~130 bps to ~2% since the first week of November.
![](https://blogger.googleusercontent.com/img/b/R29vZ2xl/AVvXsEj7m7v6tNHDtWUeZgRtf_ohfNroDg4zl4SKOPqwfl62Kjm6iz_iDgC0t2Tl8GIz6ARFY8A6X9o9HgCPYfOkeNWAx0ndAVxuKNtjPlw0wR3jMTyYbZJwRnngOzYWUuK_GT4Qfo___bAoUg/s800/twfwd.png)
With core inflation negligible, unemployment at 10%, and excess capacity still very... excess, this is definitely way on the optimistic side of my personal forecast.
Source: Federal Reserve
Source: Federal Reserve
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