How collateral scarcity reshaped the US yield curve

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We all have been taught that short-term policy rates drive the whole yield curve – specifically, that market expectations about the future path of the overnight federal funds rate are reflected in 10-year yields and beyond.

In recent years, that transmission mechanism has broken down, with policy rate hikes not percolating to the long end of the yield curve. Since the US Federal Reserve’s liftoff in December 2015 from zero to 2.5%, the 10-year Treasury yield actually declined from 2.30% to 2.06

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