TBT - Weekly Treasury Simulation, May 23, 2025: One-Month Forward Rate Peak Up 0.18% To 6.23%

2025-05-27 13:22:54 ET

Summary

• The most likely range for 3-month bill yields is again the 1% to 2% range, just 20 basis points more likely than the 0% to 1% range. Treasury 2-year yields moved to 4% this week from 3.98% last week. At 10 years, this week’s yield is 4.51%, compared with 4.43% last week. As a result, the current 2-year/10-year Treasury spread is now 0.51% compared to 0.45% last week.
• The maximum probability that the 2-year/10-year Treasury spread is negative in the coming ten years is 25.5% in the 91-day period ending November 4, 2039, compared to 25.3% last week.
• The long-term peak in 1-month forward Treasuries is now 6.23% and well above the shortest maturity forward rate at 4.36%. The longest maturity 1-month forward rate is now 4.55% versus 4.19% last week.

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 the full 30-year maturity range. The graph also shows a decline in expected yields at a steady pace for the full 30 years. We explain the details below....

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