This report offers a thorough examination of recent trends and projections within the Treasury market, scrutinizing the behavior of 3-month bill yields, 2-year Treasury notes, and 10-year Treasury notes. It highlights significant market movements, the dynamics of yield spreads, and anticipated future probabilities. A key aspect of this analysis involves the quantification of risk premiums embedded in forward rates, providing a deeper understanding of market expectations beyond simple projections.
In the past week, the projected range for 3-month bill yields over the next decade remained anchored between 1% and 2%. Notably, the likelihood of yields falling within this specific bracket saw a modest increase of 0.15% compared to the 0% to 1% range. Concurrently, the yields on 2-year Treasury notes experienced a slight uptick, rising to 3.6% from 3.59% in the preceding week. In contrast, the 10-year Treasury yields maintained stability at 4.24%, showing no change from the previous week's figures.
Consequently, the spread between the 2-year and 10-year Treasury yields compressed slightly, settling at 0.64% this week, down from 0.65%. The analysis also indicates a persistent probability of a negative 2-year/10-year Treasury spread in the coming decade, with the highest chance recorded at 24.7% for the 91-day period concluding on January 6, 2040, mirroring the previous week's assessment. Furthermore, the highest point for 1-month forward Treasuries is now observed at 5.91%, significantly surpassing the shortest maturity forward rate of 3.78%. This marks a minor decrease from the previous week's peak of 5.97%. The longest maturity 1-month forward rate has also shown a slight increase, moving to 4.59% from 4.56%.
The current market data underscore the critical role of forward rates, which, as articulated by Professor Robert Jarrow, encapsulate a risk premium beyond the market’s direct expectations for future rates. This premium is a crucial component in understanding the true cost of borrowing and lending across various time horizons. These detailed observations provide valuable insights into the Treasury market's evolving structure and its implications for investors and policymakers alike. The nuanced movements in yields and spreads reflect underlying economic forces and investor sentiment, making continuous monitoring essential for informed decision-making.