Weekly Treasury Simulation, February 14, 2024: Most Likely Range For 10-Year Yield Is 2% To 3% In 2035

2025-02-18 18:17:04 ET

Summary

• Treasury 2-year yields moved to 4.26% this week from 4.31% last week. At 10 years, this week’s yield is 4.47%, compared with 4.52% last week. As a result, the current 2-year/10-year Treasury spread is now 0.21% compared to 0.21% last week.
• The maximum probability that the 2-year/10-year Treasury spread is negative again in the coming ten years is 26.3% in the 91-day period ending February 13, 2026, compared to 28.9% last week.
• The long-term peak in 1-month forward Treasuries is now 5.38% and well above the shortest maturity forward rate at 4.37%. The longest maturity 1-month forward rate is now 4.04% versus 4.05% last week.

Summary

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 at a steady pace for the full 30 years. We explain the details below.

For more on this topic, see the analysis of government bond yields in 14 countries through January 31, 2025 given in the appendix....

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