VGSH - SAS Weekly Forecast June 21: Negative Treasury 2/10-Year Spread Streak Now 492 Days

2024-06-25 07:30:08 ET

Summary

• The Treasury curve was up 3 basis points at 2 years and was up 5 basis points at 10 years over the last week.
• As a result, the current negative 2-year/10-year Treasury spread narrowed slightly to negative 45 basis points this week compared to negative 47 basis points a week earlier.
• The current negative 2-year/10-year Treasury spread is the longest such streak since the launch of the 2-year note in 1976.
• The probability that the 2-year/10-year Treasury spread is still negative in the 13 weeks ending December 20, 2024 is 72.2%, compared to 73.4% last week.
• The long-term peak in 1-month forward Treasuries is now 5.12%, up 0.01% from last week, and well below the near-term peak at 5.50%.

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 most of the 30-year maturity range. The graph also shows a sharp downward shift in expected yields in the first few years, then the decline continues at a slow but steady pace for the full 30 years. We explain the details below.

For further details see: