Weekly Forecast, June 2, 2023: Treasury Forward Rates Shift Down In Short-Term Maturities (2023)

Weekly Forecast, June 2, 2023: Treasury Forward Rates Shift Down In Short-Term Maturities (1)

The resolution of the Treasury debt cap crisis has resulted in a significant downward shift in the U.S. Treasury forward rate curve for near-term maturities compared to last week. Both implied forward Treasury 1-month bill rates and simulated 3-month bill rates show a sharp drop in the second semi-annual period in today’s simulation. The probability that the inverted yield curve ends by November 24, 2023 is now 8.8% compared to 8.5% 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 1-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 Treasury yields since 1962. The risk premium, the reward for a long-term investment, is large but narrowing over the full maturity range to 30 years. The graph also shows a sharp downward shift in yields in the first few years, as explained below.

For more on this topic, see the analysis of U.S. Treasury yields through March 31, 2023 given in the appendix.

Inverted Yields, Negative Rates, and U.S. Treasury Probabilities 10 Years Forward

The negative 2-year/10-year Treasury spread has now persisted for 229 trading days. The spread is currently at a negative 81 basis points compared to negative 74 last week. The table below shows that the current streak of inverted yield curves is now the third longest in the U.S. Treasury market since the 2-year Treasury yield was first reported on June 1, 1976:

In this week’s forecast, the focus is on three elements of interest rate behavior: the future probability of the recession-predicting inverted yield curve, the probability of negative rates, and the probability distribution of U.S. Treasury yields over the next decade.

We start from the closing U.S. Treasury yield curve published daily by the U.S. Department of the Treasury. Using a maximum smoothness forward rate approach, Friday’s implied forward rate curve shows a quick rise in 1-month rates to an initial peak of 5.66%, versus 6.00% last week. After the initial rise, there is substantial volatility and rates peak again at 3.66%, compared to 3.92% one week ago. Rates finally peak again at 5.11%, compared to 5.11% last week, and then decline to a lower plateau at the end of the 30-year horizon.

Using the methodology outlined in the appendix, we simulate 500,000 future paths for the U.S. Treasury yield curve out to thirty years. The next three sections summarize our conclusions from that simulation.

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Inverted Treasury Yields: Inverted Now, 91.2% Probability by December 1, 2023

A large number of economists have concluded that a downward sloping U.S. Treasury yield curve is an important indicator of future recessions. A recent example is this paper by Alex Domash and Lawrence H. Summers. We measure the probability that the 10-year par coupon Treasury yield is lower than the 2-year par coupon Treasury for every scenario in each of the first 80 quarterly periods in the simulation.[1] The next graph shows that the probability of an inverted yield remains high, peaking at 91.2%, compared to 91.5% one week before, in the 91-day quarterly period ending December 1, 2023.

Negative Treasury Bill Yields: 5.2% Probability by November 26, 2027

The next graph describes the probability of negative 3-month Treasury bill rates for all but the first 3 months of the next 3 decades. The probability of negative rates starts near zero but spikes, declines and then rises steadily to peak at 5.2%, compared to 4.7% one week earlier, in the period ending November 26, 2027:

Calculating the Default Risk from Interest Rate Maturity Mismatches

In light of the interest-rate-risk-driven failure of Silicon Valley Bank of SVB Financial Group (OTCPK:SIVBQ) on March 10, 2023, we have added a table that applies equally well to bank or institutional interest rate mismatches or individual mismatches from buying long-term Treasury bonds on margin. We assume that the sole asset is a 10-year Treasury bond purchased at time zero at par value of $100. We analyze default risk for four different initial market value of equity to market value of asset ratios: 5%, 10%, 15%, and 20%. For the banking example, we assume that the only class of liabilities is deposits that can be withdrawn at par at any time. In the institutional and retail investor case, we assume that the liability is essentially a borrowing on margin/repurchase agreement with the possibility of margin calls. For all investors, the amount of liabilities (95, 90, 85 or 80) represents a “strike price” on a put option held by the liability holders. Failure occurs via a margin call, bank run, or regulatory take-over (in the banking case) when the value of assets falls below the value of liabilities.

The chart below shows the cumulative 10-year probabilities of failure for each of the 4 possible capital ratios when the asset’s maturity is 10 years. For the 5 percent case, that default probability is 39.87%, compared to 40.42% from last week.

This default probability analysis is updated weekly based on the U.S. Treasury yield simulation described in the next section. The calculation process is the same for any portfolio of assets with credit risk included for many asset classes.

U.S. Treasury Probabilities 10 Years Forward

In this section, the focus turns to the decade ahead. This week’s simulation shows that the most likely range for the 3-month U.S. Treasury bill yield in ten years is from 1% to 2%. There is a 24.03% probability that the 3-month yield falls in this range, a change from 23.80% one week before. Note the significant shift downward in the second semi-annual period. For the 10-year Treasury yield, the most likely range is from 3% to 4%. The probability of being in this range is 22.03%, compared to 22.21% one week prior.

In a recent post on SeekingAlpha, we pointed out that a forecast of “heads” or “tails” in a coin flip leaves out critical information. What a sophisticated bettor needs to know is that, on average for a fair coin, the probability of heads is 50%. A forecast that the next coin flip will be “heads” is literally worth nothing to investors because the outcome is purely random.

The same is true for interest rates.

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In this section we present the detailed probability distribution for both the 3-month Treasury bill rate and the 10-year U.S. Treasury yield 10 years forward using semi-annual time steps. We present the probability of where rates will be at each time step in 1 percent “rate buckets.” The forecast for 3-month Treasury yields is shown in this graph:

3-Month U.S. Treasury Yield Data:


The probability that the 3-month Treasury bill yield will be between 1% and 2% in 2 years is shown in column 4: 29.57%. The probability that the 3-month Treasury bill yield will be negative (as it has been often in Europe and Japan) in 2 years is 2.07% plus 0.08% plus 0.00% = 2.15% (difference due to rounding). Cells shaded in blue represent positive probabilities of occurring, but the probability has been rounded to the nearest 0.01%. The shading scheme works like this:

  • Dark blue: the probability is greater than 0% but less than 1%
  • Light blue: the probability is greater than or equal to 1% and less than 5%
  • Light yellow: the probability is greater than or equal to 5% and 10%
  • Medium yellow: the probability is greater than or equal to 10% and less than 20%
  • Orange: the probability is greater than or equal to 20% and less than 25%
  • Red: the probability is greater than 25%.

The chart below shows the same probabilities for the 10-year U.S. Treasury yield derived as part of the same simulation.

10-Year US Treasury Yield Data:


Appendix: Treasury Simulation Methodology

The probabilities are derived using the same methodology that SAS Institute Inc. recommends to its KRIS® and Kamakura Risk Manager® clients. A moderately technical explanation is given later in the appendix, but we summarize it in plain English first.

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Step 1: We take the closing U.S. Treasury yield curve as our starting point.

Step 2: We use the number of points on the yield curve that best explains historical yield curve shifts. Using daily data from 1962 through March 31, 2023, we conclude that 10 “factors” drive almost all movements of U.S. Treasury yields.

Step 3: We measure the volatility of changes in those factors and how it has changed over the same period.

Step 4: Using those measured volatilities, we generate 500,000 random shocks at each time step and derive the resulting yield curve.

Step 5: We “validate” the model to make sure that the simulation EXACTLY prices the starting Treasury curve and that it fits history as well as possible. The methodology for doing this is described below.

Step 6: We take all 500,000 simulated yield curves and calculate the probabilities that yields fall in each of the 1% “buckets” displayed in the graph.

Do Treasury Yields Accurately Reflect Expected Future Inflation?

We showed in a recent post on SeekingAlpha that, on average, investors have almost always done better by buying long term bonds than by rolling over short term Treasury bills. That means that market participants have generally (but not always) been accurate in forecasting future inflation and adding a risk premium to that forecast.

The distribution above helps investors estimate the probability of success from going long.

Finally, as mentioned weekly in The Corporate Bond Investor Friday overview, the future expenses (both the amount and the timing) that all investors are trying to cover with their investments are an important part of investment strategy. The author follows his own advice: cover the short-term cash needs first and then step out to cover more distant cash needs as savings and investment returns accumulate.

Technical Details

Daily Treasury yields form the base historical data for fitting the number of yield curve factors and their volatility. The historical data is provided by the U.S. Department of the Treasury.

An example of the modeling process using data through March 31, 2023 is available at this link.

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The modeling process was published in a very important paper by David Heath, Robert Jarrow and Andrew Morton in 1992:

For technically inclined readers, we recommend Prof. Jarrow’s book Modeling Fixed Income Securities and Interest Rate Options for those who want to know exactly how the “HJM” model construction works.

The number of factors (10 for the United States) has been stable for some time.


[1] After the first 20 years in the simulation, the 10-year Treasury cannot be derived from the initial 30 years of Treasury yields.

For a daily ranking of the best risk-adjusted value of corporate bonds traded in the U.S. market, please check out a free trial of The Corporate Bond Investor. Subscribers are actively arbitraging 161-year-old legacy credit ratings using modern big data default probabilities from Kamakura Corporation. Remember, the Pony Express and credit ratings were both invented in 1860. Are you still using the Pony Express?

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1. Calculate a forward looking assessment of the investor's cash needs

2. Rank bonds from best to worst by the reward-to-risk ratio

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What is the T bill forecast for 2023? ›

Prediction of 10 year U.S. Treasury note rates 2019-2023

In May 2023, the yield on a 10 year U.S. Treasury note was 3.57 percent, forecasted to increase to reach 3.32 percent by January 2024. Treasury securities are debt instruments used by the government to finance the national debt. Who owns treasury notes?

What is the yield curve forecast for 2023? ›

The United States 10 Years Government Bond Yield is expected to be 3.593% by the end of September 2023. It would mean a decrease of 7.6 bp, if compared to last quotation (3.669%, last update 6 Jun 2023 11:15 GMT+0). Forecasts are calculated with a trend following algorithm.

What is the bond rate forecast for the Treasury? ›

The United States Government Bond 10Y is expected to trade at 3.81 percent by the end of this quarter, according to Trading Economics global macro models and analysts expectations. Looking forward, we estimate it to trade at 4.17 in 12 months time.

What is the short term Treasury rate? ›

Treasury Yield Curve
1 Month Treasury Rate5.25%
1 Year Treasury Rate5.17%
10 Year Treasury Rate3.69%
10 Year-3 Month Treasury Yield Spread-1.77%
10-2 Year Treasury Yield Spread-0.77%
2 more rows

What is the interest rate forecast for 2023 and 2024? ›

Both estimates are largely in line with fresh projections from officials in March. The Fed penciled in a 5-5.25 percent peak interest rate for 2023, after which officials see rates falling to 4.25-4.5 percent by the end of 2024.

Is T Bill a good investment in 2023? ›

Are Treasury Bills a good investment for 2023? US Treasury bills (T-bills) are considered safe and low-risk investments. They are issued by the United States government and backed by its full faith and credit. Investing in T-Bills isn't necessarily a good long-term strategy, but they are good for short-term goals.

How far will interest rates drop in 2023? ›

“Bank of America Global Research expects mortgage rates to fall to 5.25% by year-end.” Zillow Home Loans senior macroeconomist Orphe Divounguy. “A fight over raising the debt ceiling is likely to drag into the summer, and mortgage borrowers should expect rate volatility as a result.”

What will Treasury bond rates be in 2023? ›

May 1, 2023. Series EE savings bonds issued May 2023 through October 2023 will earn an annual fixed rate of 2.50% and Series I savings bonds will earn a composite rate of 4.30%, a portion of which is indexed to inflation every six months.

What is likely to happen to interest rates in 2023? ›

Are mortgage rates expected to rise or fall during 2023? The consensus is that mortgage rates will gradually decline throughout the year, even if interest rates go up.

Do Treasuries go down when interest rates rise? ›

Most bonds and interest rates have an inverse relationship. When rates go up, bond prices typically go down, and when interest rates decline, bond prices typically rise.

What is the forecast for the 6 month T bill? ›

The United States 6 Month Bill Yield is expected to trade at 5.63 percent by the end of this quarter, according to Trading Economics global macro models and analysts expectations. Looking forward, we estimate it to trade at 6.03 in 12 months time.

Should you buy Treasury bonds when interest rates rise? ›

Including bonds in your investment mix makes sense even when interest rates may be rising. Bonds' interest component, a key aspect of total return, can help cushion price declines resulting from increasing interest rates.

Are short-term Treasuries risky? ›

Short-term bonds can be relatively low-risk, predictable income. Stronger returns can be realized when compared to money markets. Some bonds even come tax-free. A short-term bond offers a higher potential yield than money market funds.

How safe are short-term Treasuries? ›

A Treasury bill, or T-bill, is a short-term debt obligation backed by the U.S. Treasury Department. It's one of the safest places you can save your cash, as it's backed by the full faith and credit of the U.S. government.

How safe are short-term Treasury bonds? ›

Treasury securities are considered a safe and secure investment option because the full faith and credit of the U.S. government guarantees that interest and principal payments will be paid on time.

Will interest rates go down in 2023 in the US? ›

We expect that 30-year mortgage rates will end 2023 at 5.2%,” the organization noted in its forecast commentary. It since has walked back its forecast slightly but still sees rates dipping below 6%, to 5.6%, by the end of the year.

Will Treasury yields rise 2023? ›

Investment professionals surveyed by Bankrate expect the 10-year yield to be 3.7 percent at the end of the first quarter of 2024, down slightly from the 3.8 percent level they expected it to reach at the end of 2023, as indicated in the previous survey.

Are Treasury bills safer than CDS? ›

Treasury bills can be a good choice for those looking for a low-risk, fixed-rate investment that doesn't require setting money aside for as long as a CD might call for. However, you still run the risk of losing out on higher rates and returns if the market is on the upswing while your money is locked in.

What will the 30 year treasury be in 2023? ›

The United States 30 Years Government Bond Yield is expected to be 4.123% by the end of September 2023. It would mean an increase of 28.9 bp, if compared to last quotation (3.834%, last update 2 Jun 2023 2:15 GMT+0).

Will interest rates go down in May 2023? ›

May mortgage rate predictions

Mortgage rates are likely to remain volatile this month. While most forecasters call for them to ease below 6 percent later this year, that prediction assumes the Federal Reserve's war on inflation will continue to bear fruit.

Will there be more interest rate hikes in 2023? ›

The US Federal Reserve will deliver a final 25-basis-point interest rate increase in May and then hold rates steady for the rest of 2023, according to a Reuters poll of economists. The poll also showed that a short and shallow US recession is likely this year.

Will interest rates go down in December 2023? ›

After home financing costs nearly doubled in 2022, some relief is in sight for potential homebuyers in 2023. The interest rate for a 30-year fixed-rate mortgage in the U.S. is expected to drop to 5.25% by the end of this year, according to a forecast by the financial services website Bankrate.

What is the treasury rate for April 2023? ›

The interest rate determined for fiscal year 2023 in accordance with the above-quoted formula is 2.7141% which adjusted to the nearest 1/8 of 1% is 2-3/4%.

Where are interest rates going in the next 5 years? ›

The predictions made by the various analysts and banks provide insight into what the financial markets anticipate for interest rates over the next few years. Based on recent data, Trading Economics predicts a rise to 5% in 2023 before falling back down to 4.25% in 2024 and 3.25% in 2025.

What will happen to interest rates in january 2023? ›

January 2023
MaturityUsed for December 2022Indicated for January 2023
1 Year4-5/8%4-3/4%
5 Years4-1/8%3-3/4%
15 Years4-1/4%3-3/4%
20 Years4-3/8%3-7/8%

What is the prime rate forecast? ›

US Prime Rate Forecast (I:USPR)

US Prime Rate Forecast is at 5.76%, compared to 5.76% last quarter and 5.75% last year. This is lower than the long term average of 5.82%.

What happens when Treasuries go down? ›

Key Takeaways

Treasury bond prices and Treasury yields move inversely to one another, with falling prices lifting corresponding yields while rising prices lower the yields.

What does it mean when Treasuries go down? ›

It's also seen as a sign of investor sentiment about the economy. A rising yield indicates falling demand for Treasury bonds, which means investors prefer higher-risk, higher-reward investments. A falling yield suggests the opposite.

What does it mean when Treasury rates go down? ›

Declines in the 10-year Treasury yield generally indicate caution about global economic conditions while gains signal global economic confidence.

What is the projected 1 year T bill rate? ›

The United States 1 Year Government Bond Yield is expected to be 5.533% by the end of September 2023. It would mean an increase of 33.3 bp, if compared to last quotation (5.2%, last update 5 Jun 2023 23:15 GMT+0).

What is the expected 1 year T bill rate? ›

1 Year Treasury Rate is at 5.20%, compared to 5.17% the previous market day and 2.23% last year. This is higher than the long term average of 2.89%.

What is the forecast for the one year treasury constant maturity rate? ›

U.S. Treasury Securities with One Year Maturity. Percent, Average of Month.
MonthDateForecast Value
4Aug 20234.99
5Sep 20235.06
6Oct 20234.89
7Nov 20234.72
5 more rows
May 5, 2023

What happens to bonds when stock market crashes? ›

When the bond market crashes, bond prices plummet quickly, just as stock prices fall dramatically during a stock market crash. Bond market crashes are often triggered by rising interest rates. Bonds are loans from investors to the bond issuer in exchange for interest earned.

Do Treasury bonds go up when stocks go down? ›

So interest rates fall, bond prices rise - vice versa. And in a recession - you know, when the stock market is usually crashing - the Fed will be anxiously cutting interest rates to boost the economy - you know? - to stem that crash. So in this situation, bond prices would tend to go up.

Should you buy Treasury bonds during inflation? ›

Key Takeaways. Gold is often hailed as a hedge against inflation—increasing in value as the purchasing power of the dollar declines. However, government bonds are more secure and have shown to pay higher rates when inflation rises, and Treasury TIPS provide built-in inflation protection.

What is the 5 year treasury rate for 2023? ›

The values shown are daily data published by the Federal Reserve Board based on the average yield of a range of Treasury securities, all adjusted to the equivalent of a five-year maturity. The current 5 year treasury yield as of May 17, 2023 is 3.58%.

Will interest keep going up in 2023? ›

Fed forecasts show one more rate hike could be possible for 2023, likely at the May 3 meeting. But Federal Reserve Chair Jerome Powell emphasized they “may” hike rates one more time, suggesting that increase might not happen. So far in 2023, the Fed raised rates 0.25 percentage points twice.

Why would anyone buy a 30 year Treasury? ›

As compensation for this, bonds with longer terms to maturity generally carry higher yields than shorter maturity bonds issued at the same time. Thirty-year treasuries are the longest maturity bonds offered by the federal government, and therefore deliver higher returns than contemporary 10-year or three-month issues.

What is the projected 7 year Treasury? ›

U.S. Treasury Securities with 7 Year Maturity. Percent. Average of Month.
MonthDateForecast Value
3Aug 20233.93
4Sep 20233.94
5Oct 20233.77
6Nov 20233.61
5 more rows

What is the 52 week Treasury bill rate? ›

US 52W5.270.051%
US 2Y4.490.008%
US 3Y4.130.009%
US 5Y3.840.011%
11 more rows

Are T-bills good when interest rates rise? ›

However, if interest rates are rising, existing T-bills fall out of favor since their rates are less attractive compared to the overall market. As a result, T-bills have interest rate risk, which means there is a risk that existing bondholders might lose out on higher rates in the future.

How often do 6 month T-bills pay interest? ›

We sell Treasury Notes for a term of 2, 3, 5, 7, or 10 years. Notes pay a fixed rate of interest every six months until they mature. You can hold a note until it matures or sell it before it matures.

What is the 5 year Treasury rate predicted to be? ›

The United States 5 Year Note Yield is expected to trade at 4.02 percent by the end of this quarter, according to Trading Economics global macro models and analysts expectations. Looking forward, we estimate it to trade at 4.46 in 12 months time.

What will interest rates be at end of 2023? ›

Current Refinance Rates for June 2023

30-year fixed: 7.21% 15-year fixed: 6.76% 30-year jumbo: 7.29%

Will Fed drop rates in 2023? ›

When Will Interest Rates Go Down? First, we expect the Fed to pause its rate hikes by summer 2023 (the May hike was the last one, in our view). Then, starting around the end of 2023, we expect the Fed to begin cutting the federal-funds rate.

Will Feds raise interest rates in June? ›

BENGALURU, June 7 (Reuters) - The U.S. Federal Reserve will not raise interest rates for the first time in well over a year at its June 13-14 meeting, according to economists polled by Reuters, but a significant minority expects at least one more hike this year as the economy remains resilient.


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