2024-04-15 17:21:57 ET
Summary
- The Treasury curve was up 15 basis points at 2 years and was up 11 basis points at 10 years over the last week.
- As a result, the current negative 2-year/10-year Treasury spread widened to negative 38 basis points this week, compared to negative 34 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 October 11, 2024, is 71.0%, compared to 65.9% last week.
- The long-term peak in 1-month forward Treasuries is now 5.39%, up 0.05% from last week but still below the near-term peak at 5.46%.
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 (US30Y). 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.
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Weekly Forecast, April 12, 2024: Higher For Longer