How exposed are US Treasuries to tighter Fed policy?

The broad-based strength of the last two US employment reports has seen investors reassess the outlook for US monetary policy. Investors now expect the federal funds rate to rise at a faster pace than they did one month ago, which has underpinned the rise in US Treasury yields since the end of October. Nevertheless, we still think that investors are underestimating the speed at which the federal funds rate will rise next year, as they have done during previous tightening cycles. Accordingly, we expect US Treasury yields to continue to rise next year.