The shape of the U.S. Treasury yield curve appears to reflect two expected Federal Reserve reductions in
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However, the market also believes that the Federal Reserve reductions will be reversed in a single 100-bp increase in the federal funds rate 2½ years from now. You expect liquidity premiums to remain 10 bp per year for each of the next 3 years (out through the 3-year benchmark).
Describe or draw the shape of the Treasury yield curve out through the 3-year benchmark. Which term structure theory supports the shape of the U.S. Treasury yield curve you have described?
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