Weekly Treasury Simulation, April 4, 2025: Impacts Of The Tariff Shocks

2025-04-07 11:25:54 ET

Summary

• Treasury 2-year yields moved to 3.68% this week from 3.89% last week. At 10 years, this week’s yield is 4.01%, compared with 4.27% last week.
• As a result, the current 2-year/10-year Treasury spread is now 0.33% compared to 0.38% last week.
• The maximum probability that the 2-year/10-year Treasury spread will be negative again in the coming ten years is 23.8% in the 91-day period ending December 17, 2038, compared to 24.0% last week.
• The long-term peak in 1-month forward Treasuries is now 5.30% and well above the shortest maturity forward rate at 4.36%. The longest maturity 1-month forward rate is now 3.89% versus 4.26% last week.

As explained in Prof. Robert Jarrow's book cited below, forward rates contain a risk premium above and beyond the market's expectations for the 3-month forward rate. We document the size of that risk premium in this graph, which shows the zero-coupon yield curve implied by current Treasury prices compared with the annualized compounded yield on 3-month Treasury bills that market participants would expect based on the daily movement of government bond yields in 14 countries since 1962. The risk premium, the reward for a long-term investment, is large and widens over the full 30-year maturity range. The graph also shows a decline in expected yields at a steady pace for the full 30 years. We explain the details below.

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