Is the Treasury market braced for future Fed tightening?

We think the US federal funds rate will have been raised to about 4% by the end of 2017. However, based on a decomposition of the Treasury yield curve, it looks like the bond market is more or less braced for such an outcome already. What’s more, we expect the Fed to tighten the screws with care and anticipate that the federal funds rate may still be as low as 1% at the end of 2015. This is a key reason why we forecast that the 10-year Treasury yield will have only risen to around 3.5% by then.