Medium-term U.S. Treasury yields fell in January, despite some advances in risk markets and signs of economic growth, after the FOMC announced (Jan 25) that conditions would likely warrant an "exceptionally low" fed funds rate through late 2014.  Previously, rates declined in December due to shifting concerns over global growth prospects and Europe's debt crisis.  Yields were little changed in November as Europe's debt crisis was offset by more encouraging U.S. economic data.  Long-term rates increased in October as Europe began to stabilize its debt crisis.  In Q3, long-term rates fell considerably as the FOMC decided to extend the average maturity of its Treasury debt holdings to combat economic weakness.  Rates fell despite a substantial increase in the U.S. debt ceiling and the S&P ratings downgrade.  In Q2, rates declined amid greater uncertainty given the previous surge in oil prices, concerns over slower growth and difficulties resolving Europe's debt crisis.  For Q1, rates increased amid signs of an improving U.S. economy, inflation and concern over deteriorating fiscal conditions. Overall, rates fell significantly in 2011 as an uneven economy and a volatile risk appetite benefited U.S. government debt.  

• Libor:  On February 2, one and three-month U.S. Libor set at 0.26250% and 0.53060% respectively.  Libor has declined modestly since the beginning of the year after more than doubling (three-month) from July when higher funding costs began impacting several banks.  Efforts by the Fed and other key central banks, to provide cheaper dollar liquidity since early December combined with the ECB's sizeable bank loan program (Dec 21), have helped improve conditions in the interbank market.  Despite the recent climb, Libor remains only mildly above the record low levels established last summer.  According to the futures market, three-month Libor is expected to end 2012, 2013 and 2014 at 0.46%, 0.57% and 0.96% respectively.  One and three-month Libor are a respective 433 and 429 bps lower than their 2008 crisis peak after continued government support to the financial system.  
   
• Fed Policy:  On Feb 2 in testimony before the House Budget Committee, Fed Chairman Bernanke said "indicators of spending, production, and job market activity have shown some signs of improvement." On Jan 25, the FOMC Statement acknowledged the U.S. economy has been expanding moderately in the context of slowing global growth but concerns remained over a "depressed" housing sector, an "elevated" unemployment rate and "strains" in global financial markets.  To support a stronger economic recovery, the FOMC announced it expects to maintain an "exceptionally low" fed funds rate through at least late 2014.  Eight of seventeen policymakers, providing fed funds forecasts, believed a funds target of at least 1% would be appropriate by the end of 2014. 
   
• Economic Indicators:  Recent U.S. data releases showed that in January, net job creation picked up, the unemployment rate fell to 8.3%, activity in the service sector (ISM NM) expanded more quickly, growth in the manufacturing sector (ISM) expanded at the fastest pace in 7 months while consumer confidence declined.  In December, the pace of new home sales remained sluggish, existing home sales activity increased modestly, consumer prices were little changed, capacity utilization matched a 41 month high and retail sales increased minimally.  In November, business inventories increased 0.3%, in line with sales (up 0.3%), maintaining a fairly tight inventory-to-sales ratio.  In Q4, real GDP increased at a 2.8% annual rate and consumer spending grew at a 2.0% annual pace - up from 1.7% in Q3.