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Treasury Yields Are Rising; The Fed Will Hike 'When Doves Cry'

NEW YORK (TheStreet) -- The voting spots on the Federal Reserve's Federal Open Market Committee have been dominated by doves for too many years. Today, however, the FOMC appears to have a commitment to end quantitative easing following its Oct. 28-29 FOMC meeting.

The message from Main Street to the FOMC comes from the No. 1 smash hit When Doves Cry by Prince. Homeowners and consumers are singing the refrain, "How can u just leave me standing?" "Alone in a word that's so cold?" "Why do we scream at each other?" "This is what it sounds like, when doves cry"

Main Street will be much better off when it hears the doves of the FOMC cry out that first rate hike and banks begin to pay savers higher rates on CDs and money market funds.

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My bet is that the Federal Reserve will begin hiking rates around the middle of 2015.

The signals that led to a rise (or decline) in yields during my career as a bond trader and then as a market strategist came from my charts and graphs. The benchmarks I track are the yields on the two-year, three-year, five-year, seven-year and 10-year notes and the yield on the 30-year bond.

The relationship between any two maturities is known as a spread. A two-issue spread is calculated by simply subtracting the yield on the shorter maturity from the yield of the longer maturity.

For example, June's closing yield for the 10-Year note was 2.521% with the yield for the two-year note at 0.461%. The two-year/10-year spread ended June at 2.059 percentage points, or 205.9 basis points. At the end of 2013 this spread was 264.3 basis points, so this portion of the U.S. Treasury yield curve had flattened by 58.4 basis points.

This dynamic occurred with the yield on the two-year rising by 0.078% and the yield on the 10-Year declining 0.506%. This is a sign that professional U.S. Treasury traders are betting that the Federal Reserve will raise rates, most likely about six months after quantitative easing ends.

One reason the 10-year yield is lower is the process called curve flattening. This is a reversal of the longer-term trade, which was the bet that the yield curve would continue to steepen as the Fed prolonged QE.

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