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FINC 3321 Dr. Durmaz CASE – 1 Due: 3/12 11:00 pm Case Study Instructions: Case studies must be typed using 12-point Times New Roman font with 1-inch margins all around. No cover sheet is necessary. Place your name in the header at the top of each page. Case studies should not exceed 3 pages in length. The bulk of your grade will be based on your ability to perform the requested analyses and provide an accurate interpretation. However, spelling, grammar, and syntax are also part of the overall grade, as poor writing can make it difficult to evaluate your responses. Please read the attached article: “Yellen’s Talk of Hot U.S. Economy Extends October Long-Bond Rout” Part I (90%)  Discussion Questions 1. What is the yield curve? Why is does it almost always slope upward? What influences its slope? 2. Explain why the yield curve would steepen due to what Janet Yellen said about letting the economy "run hot." 3. What is an inflation risk premium? What effect does the inflation risk premium have on the yield curve? Explain why undershooting unemployment rates and overshooting on price growth should argue for a steeper yield curve and higher inflation risk premiums, as was stated in "Yellen’s Talk of Hot U.S. Economy Extends October Long-Bond Rout" (Businessweek.com, October 15, 2016). 4. Why would the Fed want to produce inflation? How would that be healthy for the economy? 5. What is the ten-year break-even rate? How is it calculated? Explain how it can serve as a gauge of inflation expectations. 6. What interest rates does the Federal Reserve directly control? Why is it common to speak about the Fed controlling interest rates, as if it controlled all of them?

Part II (12%) Quiz Questions ï‚· Fill in the Blank 1. The chair of the Federal Reserve is _____ _____. 2. The ten-year break-even rate is used by analysts as a gauge of _____. ï‚· True or False 3. The yield curve steepened at the end of the week that the article was written because long-dated bonds were outperforming shorter-dated bonds in terms of price increases. 4. Undershooting unemployment rates and overshooting on price growth should steepen the yield curve and reduce inflation risk premiums. 5. Inflation has for years been dormant in the United States and developed nations, a key reason the Fed has held off on raising interest rates in 2016. 6. Longer-dated debt offers higher yields but is more sensitive to inflation expectations.

Yellen’s Talk of Hot U.S. Economy Extends October Long­Bond Rout ­ Bloomberg Yellen’s Talk of Hot U.S. Economy Extends October Long-Bond Rout
by Brian Chappatta and Yun Li
October 14, 2016, 11:00 PM CDT ➞ Treasury 30-year yield jumps by most since ’15 in past 2 weeks ➞ Fed chair pondered merits of ‘high-pressure economy’ in speech Federal Reserve Chair Janet Yellen may have just shattered the complacency among investors in the longest-dated U.S. sovereign debt.
Treasury 30-year yields surged Friday, extending the bonds’ biggest two-week decline since May 2015, as Yellen hinted at letting U.S. growth
run hot in a speech <https://allaplusessays.com/order; to a
Boston Fed conference. She pondered whether a “high-pressure economy” could boost areas like labor-force participation. A gauge of the yield
curve steepened by the most since March as longer-dated debt underperformed. “She talks about the merit in letting the economy run hot temporarily,” said Priya Misra, head of global interest-rate strategy in New York at TD
Securities (USA) LLC, one of 23 primary dealers that trade with the central bank. Undershooting unemployment rates and overshooting on
price growth “should argue for a steepener and higher inflation risk premiums.”
Inflation has for years been dormant in the U.S. and developed nations, which is a key reason the Fed has held off on raising interest rates in
2016 and other central banks have embarked on unconventional stimulus measures. That’s led investors to seek longer-dated debt, which https://allaplusessays.com/order 1/4 Yellen’s Talk of Hot U.S. Economy Extends October Long­Bond Rout ­ Bloomberg offers higher yields but is more sensitive to inflation expectations. In one sign of investor complacency, the real U.S. 30-year yield -- which
subtracts the level of inflation based on the core Consumer Price Index -- is hovering near the lowest level since 1980. The 30-year bond yield climbed 11 basis points this week, or 0.11 percentage point, to 2.56 percent at 5 p.m. Friday in New York, according to
Bloomberg Bond Trader data, the highest since June. The yield increased 24 basis points in the past two weeks, the most in 17 months.
The two-year note yield was little changed at 0.83 percent.
The difference between yields on five- and 30-year debt, a gauge of the yield curve, climbed to about 1.27 percentage points, the highest closing
level since Sept. 15.
“If you look at the curve, it’s clearly telling you that the market believes that it’s a dovish tilt, wanting the economy to run hotter, allowing rates
to stay low for longer and to produce inflation,” said Charles Comiskey, head of Treasury trading in New York at Bank of Nova Scotia, a primary
dealer. Traders are scouring data for signs that the U.S. economy is strong enough to warrant a rate hike. Yellen’s remarks come two days after minutes
of the Fed’s September policy committee meeting showed <https://allaplusessays.com/order; “several” of the majority who supported the decision to hold rates steady said it was a “close call.” Inflation Outlook
https://allaplusessays.com/order 2/4 Yellen’s Talk of Hot U.S. Economy Extends October Long­Bond Rout ­ Bloomberg The 10-year break-even rate, a gauge of inflation expectations that measures the difference between yields on 10-year notes and similarmaturity Treasury Inflation Protected Securities, rose to about 1.68 percentage point, the highest since May. The U.S. will auction $5 billion of
30-year TIPS on Oct. 20.
Yellen’s focus on a hot economy and letting rates remain lower for longer doesn’t preclude the Fed from raising its benchmark this year, said
Thomas Simons at Jefferies Group LLC.
Fed fund futures indicate the probability of a rate increase by the FOMC’s December meeting is about 66 percent, up from 52 percent a month
ago. The calculations assume that the effective fed funds rate will average 0.625 percent after the next increase.
The Bloomberg Barclays U.S. Treasury Index has lost about 0.7 percent this month, on pace for the biggest decline since June 2015. Thirty-year
Treasuries have declined by about four times that amount.
“The market is really appreciating the fact the Fed will attempt to let the market overheat a little bit in order to generate more jobs and more
economic activity and encourage inflation to accelerate,” said Christopher Sullivan, who oversees $2.3 billion as chief investment officer at
United Nations Federal Credit Union in New York. Terms of Service Trademarks Privacy Policy
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