America's interest rate conundrum explained

The author of bestselling book, The Dollar Crisis explains why the long end of the US yield curve previously failed to respond to Fed rate hikes; but why the long end should now rise.

When the Federal Reserve began increasing the Federal Funds Rate in June 2004, the yield on 10-year Treasuries fell instead of rising. Indeed, yields remained below their mid-2004 level until April 2006, despite 15 rate hikes see Figure 1. Chairman Greenspan described that unexpected outcome as a ôconundrumö. In retrospect, it is now clear that the conundrum originated with the discovery of accounting irregularities at Freddie Mac and Fannie Mae.




During 2004 and 2005, when their accounting irregularities came to...

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