TMF - Weekly Forecast May 10 2024: Negative 2-Year/10-Year Treasury Spread Streak At 464 Trading Days

2024-05-13 11:58:05 ET

Summary

• The Treasury curve was up 6 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 widened to negative 37 basis points this week, compared to negative 31 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 November 8, 2024, is 68.8%, compared to 64.3% last week.
• The long-term peak in 1-month forward Treasuries is now 5.31%, down 0.06% from last week, and still below the near-term peak at 5.48%.

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 (US3M) 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 more on this topic, see the analysis of government bond yields in 14 countries through March 31, 2024, given in the appendix....

For further details see: