Weekly Treasury Simulation, Jan. 3, 2024: Steepening Yield Slope Is A Prelude To Lower Yields

2025-01-06 19:37:10 ET

Summary

• Over the last week, Treasury 2-year yields moved to 4.28% this week from 4.25% last week. At 10 years, this week’s yield is 4.6%, compared with 4.57% last week.
• As a result, the current 2-year/10-year Treasury spread is now 0.32% compared to 0.32% last week.
• The maximum probability that the 2-year/10-year Treasury spread is negative again in the coming ten years is 25.3% in the 91-day period ending March 30, 2029, compared to 26.6% last week.
• The long-term peak in 1-month forward Treasuries is now 5.45% and well above the shortest maturity forward rate at 4.44%. The longest maturity 1-month forward rate is now 4.22% vs. 4.17% 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 20-year maturity range. The graph also shows a moderate downward shift in expected yields in the first few years, followed by a decline at a steady pace for the full 20 years. We explain the details below.

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