  The paper uses functional auto-regression to predict the dynamics of interest
rate curve. It estimates the auto-regressive operator by extending methods of
the reduced-rank auto-regression to the functional data. Such an estimation
technique is better suited for prediction purposes as opposed to the methods
based either on principal components or canonical correlations. The consistency
of the estimator is proved using methods of operator theory. The estimation
method is used to analyze dynamics of Eurodollar futures rates. The results
suggest that future movements of interest rates are predictable at 1-year
horizons.
