Weekly Treasury Simulation, January 31, 2024: Term Premium For Going Long Is Significant

2025-02-03 15:10:52 ET

Summary

• Treasury 2-year yields moved to 4.22% this week from 4.27% last week. At 10 years, this week’s yield is 4.58%, compared with 4.63% last week. As a result, the current 2-year/10-year Treasury spread is now 0.36% compared to 0.36% last week.
• The maximum probability that the 2-year/10-year Treasury spread will be negative again in the coming 10 years is 24.2% in the 91-day period ending April 26, 2030, compared to 24.9% last week.
• The long-term peak in 1-month forward Treasuries is now 5.53% and well above the shortest maturity forward rate at 4.37%. The longest maturity 1-month forward rate is now 4.22% 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 at a steady pace for the full 30 years. We explain the details below.

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