The probability that federal funds rate will be 50 basis points higher than it is today drifted yet higher last week, so saith estimates derived from options on federal funds futures (based, as usual, on the technique developed by John Carlson, Ben Craig, and Will Mellick, executed flawlessly by the ever-reliable Erkin Sahinoz.) Friday's employment report contributed to most of the week's increase:
Just before the Federal Open Market Committee commenced it's measured pace of policy moves in June 2004, the yield on ten-year Treasury notes was 370 basis points. As of close of business Friday, the spread was 80 basis points. Assuming the FOMC acts as predicted and bond-market yields hold true to the pattern of the past twelve months -- which is to say, barely budge --we could be looking at a pretty flat term structure by fall.
For those of you who like to see the data up close and personal, here it is: