TD Securities economists posit the...>

US TSY FUTURES: TD Securities economists posit the "curve is not pricing in an

overshoot of the neutral rate by the Fed even though this was implied in the

September and December dot plots, and the projected overshoot will likely be

greater in the March dot plot." TD suspects the "implied fed funds rate in 2019

and 2020 to be higher than the neutral rate, the market needs to have conviction

about either of the following" 

- Higher neutral rate: "Perhaps the market believes that the true neutral rate

is much higher than implied by the Fed's median dot plot. However, with

productivity remaining around 1% y/y, there is not much evidence of a higher

neutral rate. Also note that even the most hawkish Fed members only see the

neutral rate in the 3-3.25% range."

- Inflation overshoot: "There are imminent signs of an inflation overshoot,

which will necessitate a higher than neutral fed funds rate to offset the

overheating of the economy. However, inflation surveys or TIPS breakevens remain

well off their highs." TD looks for a "unchanged 2018 median and long run dot

should result in a small dovish reaction in the rates market."