"Market expectations about Fed policy tightening have remained remarkably subdued despite increasing evidence that the U.S. economy is rebounding strongly," says Deutsche Bank Chief Economist Peter Hooper. The disconnect between what economists are forecasting, he says, and what the bond market is pricing in appears to be based on differing views about inflation, (or maybe economists just have things wrong).
Eurodollar futures continue to price in the Fed's first rate hike coming about one year from now.
"Our analysis suggests that the negative impact of global forces on U.S. inflation, while present, is likely diminishing ... The absence of a strong and growing global disinflationary force weighing on U.S. inflation has potentially important implications for market expectations and interest rates."
At 2.44%, the 10-year Treasury yield is at its lowest level since last June, but - before getting too excited about low borrowing costs - check out bailed-out Ireland, where 10-year paper yields just 2.6%.