Using the 3-mon eurodollar interest rate futures, I construct a yield curve each year for 2015-2021 using sampling date from the end of the month. If you graphed this out, you would see that the curve is shifted down each year. What I guess that is saying is that as time goes on, the market expectation for the interest rates is declining. That assessment is quite the contrary to the fed policy's tapering of asset purchase. If the fed is reducing buying assets, the rate should go up, but why would the market expectation on interest rate go down?

        1/2/14     1/31/14
2015    0.6274%    0.5574%
2016    1.5723%    1.4198%
2017    2.7359%    2.4620%
2018    3.6504%    3.2965%
2019    4.2711%    3.8773%
2020    4.6554%    4.2679%
2021    4.8879%    4.5192%
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    $\begingroup$ The closing of fed tapering was already decided months ago, so that information has already been priced in long time ago. I agree with @haginile that there are other factors determining the current yield curve aswell. $\endgroup$
    – emcor
    Oct 28, 2014 at 0:19

1 Answer 1


There are quite a few reasons:

  1. Fed funds futures rate and Eurodollar futures rate do not reflect market expectations alone. Technically speaking, a risk-free interest rate is the sum of 1) rate expectations, 2) term premium, and 3) convexity bias. Term premium is typically positive, since investors demand a higher yield for taking on more duration risk (i.e., because a 10-year bond is riskier than a 1-year bond, even if rate expectations are constant, you might expect the 10-year bond to have a higher yield). So when interest rate goes down, it could be rate expectations are coming down, or perhaps term premium is coming off, or both. The best writing on this subject (from a practitioner's perspective) is Antii Ilmanen's "Understanding the Yield Curve." I myself have written a few articles on this topic. For example, you may look at Bond Risk Premium (Part II) – Clash of Two Theories and Bond Risk Premium (Part IV) – Decomposing the Yield Curve.

  2. Economy: At the beginning of the year, investors were generally very optimistic about the US economy and believed 2014 will be the year that the economy finally reaches the "escape velocity." Well, we're in the ninth month; economic data has been pretty mixed... and a lot of market participants downgraded their economic outlook.

  3. Flows: With eurozone bond yields collapsing, US yields suddenly look very attractive. So there's decent buying of US bonds, which also contributed to the rallying in rates.

  4. The "Neutral Rate": Even the Fed's projection of the neutral level of interest rate has declined. At the beginning of the year, the Fed's famous dot chart had a median neutral rate of 4%, but it has since come down to 3.75%. This has a lot of implications for pricing long-dated forwards.


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