VGSH - Weekly Forecast February 2 2024: Long-Term Peak In 1-Month Forward Treasuries Down 0.21%
2024-02-05 15:59:09 ET
Summary
- The Treasury curve moved up 2 basis points at 2 years and was down 12 basis points at 10 years over the last week.
- As a result, the current negative 2-year/10-year Treasury spread widened to negative 33 basis points this week compared to negative 19 basis points a week earlier.
- The probability that the 2-year/10-year Treasury spread is still negative in the 13 weeks ending July 19, 2024, is 59.1%, compared to 44.9% last week.
- The long-term peak in 1-month forward Treasuries is now 5.13%, down 0.21% from last week but still below the near-term peak at 5.47%.
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 (US3M). 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.
Weekly Forecast, February 2, 2024: Long-Term Peak In 1-Month Forward Treasuries Down 0.21%