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News Link • Central Banks/Banking

Forget the Yield Curve. The Debt-Market Action Is in Fed Funds

• By Alex Harris

With all the focus on the shape of the U.S. yield curve recently, fixed-income traders could be forgiven for not concentrating so much on the growing tumult in the fed funds rate.

Not anymore.

Rising money-market rates have forced Federal Reserve officials to take

unprecedented steps to maintain control over their key policy benchmark -- and the job is about to get harder. With the Treasury continuing to ramp up bill issuance and the central bank'sbalance sheet unwind accelerating, the front-end is poised to take center stage in the second half of the year.

From further policy-tool adjustments, to the outlook for

balance-sheet normalization, to America's debt-management policies, the influence of short-term rates is set to reverberate through the financial system. It's forcing traders to focus on funding markets once again, just months after Libor's surge brought the usually sleepy corner of the fixed-income world roaring to the fore.

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