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U.S. unemployment on course to hit 6.5 percent

The taper must surely now wait until next year. It would have taken two or three robust employment reports to tip the balance in favour of a reduction in the rate of asset purchases by December, but the September report, when it came, was distinctly 'middle of the road'.

Events of the past few weeks mean that a healthy labour market is a necessary, rather than a sufficient condition for a change in policy. In light of the political shenanigans being played out in Washington, a common sense approach to fiscal policy can no longer be taken for granted by the Fed - nor indeed by anyone else. The tapering 'bar' is set a little higher now than it was in the aftermath of September's FOMC meeting.

U.S. yields are almost bound to rise from here. They could rise rapidly in the event that negotiations over the debt ceiling go down to the wire - or worse still, beyond - in February. Or they could rise gradually following a bi-partisan agreement on a long-term budget strategy in December that clears the way for tapering to begin early next year.

The only scenario in which US Treasuries do well from here is one in which Democrats and Republicans reach a new fiscal consensus, and yet the US economy takes a turn for the worse, so that the Fed continues to purchase assets at a rate of $85 billion (52 billion pounds) per month for the foreseeable future. We put a low weight on that scenario.

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