Weekly Treasury Simulation, April 25, 2025: Peak In One-Month Forward Rates Down 0.22% To 5.66%

2025-04-28 13:27:31 ET

Summary

• The most likely range for 3-month bill yields is again the 1% to 2% range, just 10 basis points more likely than the 0% to 1% range. Treasury 2-year yields moved to 3.74% this week from 3.76% last week. At 10 years, this week’s yield is 4.29%, compared with 4.41% last week. As a result, the current 2-year/10-year Treasury spread is now 0.55% compared to 0.65% last week.
• The maximum probability that the 2-year/10-year Treasury spread will be negative again in the coming 10 years is 24.6% in the 91-day period ending October 8, 2038, compared to 24.9% last week.
• The long-term peak in 1-month forward Treasuries is now 5.66% and well above the shortest maturity forward rate at 4.34%. The longest maturity 1-month forward rate is now 4.30% versus 4.2% 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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