TBT - Weekly Forecast Jan. 26: 2-Year/10-Year Treasury Spread Narrows To Negative 0.19%
2024-01-29 05:04:20 ET
Summary
- The Treasury curve moved down 5 basis points at 2 years and was unchanged at 10 years over the last week.
- As a result, the current negative 2-year/10-year Treasury spread narrowed to negative 19 basis points this week compared to negative 24 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 44.9%, compared to 49.4% last week.
- The long-term peak in 1-month forward Treasuries is now 5.34%, up 0.07% from last week but still below the near-term peak at 5.51%.
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 maturity range, narrowing slightly after the 24-year maturity. 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 almost 30 years. We explain the details below.
Weekly Forecast, Jan. 26: 2-Year/10-Year Treasury Spread Narrows To Negative 0.19%