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Yields Higher on Prospects of Tax Reform

Yields moved higher once again this week, led by the long end of the curve. The primary reason for the move higher in yields was the administration’s announcement of a tax plan framework which would lower tax rates in an effort to spur growth. The bond markets’ reaction was a resumption of the post-election rate increases, which had partially eroded as perceived odds of tax reform faded.

Longer-term rates certainly weren’t supported by Friday’s PCE release, which showed that the Fed’s preferred measure of inflation rose less than expected, and currently stands at an annualized rate of 1.4% (vs. the 2.0% target). While there are certainly a range of potential causes for the persistently low levels of inflation, none of them seem to be standing in the way of another Fed rate hike. Fed Chairwoman Yellen’s statements on Tuesday emphasized the risks of tightening monetary policy too gradually, leaving little doubt that she would prefer another rate hike this year, barring any other setbacks.

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