TBT - Weekly Forecast May 24 2024: 2-Year/10-Year Treasury Spread Widens
2024-05-29 10:05:08 ET
Summary
- The Treasury curve was up 10 basis points at 2 years and was up 4 basis points at 10 years over the last week.
- As a result, the current negative 2-year/10-year Treasury spread widened again to negative 47 basis points this week, compared to negative 41 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 22, 2024, is 78.3%, compared to 72.2% last week.
- The long-term peak in 1-month forward Treasuries is now 5.10%, down 0.14% from last week, and well 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 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, May 24, 2024: 2-Year/10-Year Treasury Spread Widens