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Don founded Kamakura Corporation in April 1990 and currently serves as its chairman and chief executive officer where he focuses on enterprise wide risk management and modern credit risk technology. His primary financial consulting and research interests involve the practical application of leading edge financial theory to solve critical financial risk management problems. Don was elected to the 50 member RISK Magazine Hall of Fame in 2002 for his work at Kamakura. Read More

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Kamakura Blog

Aug 26

Written by: Donald van Deventer
8/26/2011 1:56 AM 

Today’s forecast for U.S. Treasury yields is based on the August 25, 2011 constant maturity Treasury yields that were reported by the Board of Governors of the Federal Reserve System in its H15 Statistical Release at 4:15 pm August 26, 2011. The “forecast” is the implied future coupon bearing U.S. Treasury yields derived using the maximum smoothness forward rate smoothing approach developed by Adams and van Deventer (Journal of Fixed Income, 1994) and corrected in van Deventer and Imai, Financial Risk Analytics (1996). For an electronic delivery of this interest rate data in Kamakura Risk Manager table format, please subscribe via

The “forecast” for future U.S. dollar interest rate swap rates is derived from the maximum smoothness forward rate approach, but it is applied to the forward credit spread between the libor-swap curve (also reported in the H15 release) and U.S. Treasury curve instead of to the absolute level of forward rates for the libor-swap curve.

This week’s projections for the 1 month Treasury bill rate (investment basis) show moderate increases compared to the previous week, reversing the downward trend seen in the past few forecasts. From 2016 to 2019, bill rates are expected to increase 20-30 basis points. Bill rates are projected to rise to 4.243% in July 2021, up 7 basis points from last week. The 10 year U.S. Treasury yield is projected to rise steadily to reach 4.541% on July 31, 2021, 17 basis points higher than projected last week.

U.S. dollar swap spreads this week were a negative 34 basis points at 30 years, 4 basis points less negative than last week. Today’s forecast continues to imply a rise and fall of spreads between the Libor-swap curve and U.S. Treasuries, with a local peak in the 1 month spread of 66.5 basis points in January 2012, up 4.6 basis points from the previous forecast. Thereafter, swap spreads drop to a negative spread of 7.6 basis points in August 2012. This extreme gyration is generated by the difference in credit risk on the Libor curve (used for 1 month, 3 months, and 6 months) and the interest rate swap curve (used for one year and beyond).  Buyers of Eurodollar deposits run the risk of 100% loss of principal, but swap market participants stand to lose only the present value of the difference in original swap cash flows versus current market rates if the swap counterparty defaults with no collateral. Kamakura’s analysis ignores this credit differential, consistent with common market practice. Spreads to US Treasuries turn positive thereafter but they turn negative again from 2019 to 2021. The Libor-swap curve itself shows a peak in 1 month Libor at 74.5 basis points in January 2012 and a fall to 17.1 basis points in July 2012.  These gyrations too are caused by the differential in credit risk between the first six months of the curve and longer maturities.

These negative spreads between U.S. dollar interest rate swaps and U.S. Treasury yields reflect the blurring of credit quality between these two yield curves.  The U.S. government has no longer been seen as risk free for a while by market participants. Eurodollar rates used here are collected by the U.S. Federal Reserve and are different from the “official” libor rates collected by Thomson Reuters on behalf of the British Bankers Association. As reported in other blogs on this website, there is increasing evidence that the BBA Libor figures have been consistently set at below actual funding costs during the credit crisis that started in 2007. In an announcement made on July 6, 2011, WestLB AG requested to be dropped from the U.S. dollar labor panel effective August 1, 2011. With the removal of WestLB, 19 banks remain on the panel. Now 4 of the 19 panel banks that determine U.S. dollar libor are receiving significant government assistance and are, in effect, sovereign credits. The following banks make up the current U.S. Dollar Libor panel:

  • Bank of America
  • Bank of Nova Scotia
  • Bank of Tokyo-Mitsubishi UFJ
  • Barclays Bank PLC
  • BNP Paribas
  • Citibank NA
  • Credit Agricole Corporate Investment Bank
  • Credit Suisse
  • Deutsche Bank AG
  • HSBC
  • JP Morgan Chase
  • Lloyds Banking Group
  • Norinchukin Bank
  • Rabobank
  • Royal Bank of Canada
  • Royal Bank of Scotland Group
  • Societe Generale
  • Sumitomo Mitsui Banking Corporation
  • UBS AG

For more on the panel members, see Please note that there are periods of dramatic differences between the libor rates reported by the British Bankers Association, using the panel above, and the Eurodollar rates reflected in the H15 statistical release.  Those differences are summarized in this recent blog entry on

van Deventer, Donald R. “Kamakura Blog: Default Probabilities and Libor,” Kamakura blog,, June 7, 2010. Redistributed on on June 8, 2010.

 On March 15, 2011, UBS revealed in its 2010 annual report that the company received subpoenas concerning possible manipulation of Libor from the U.S. Securities and Exchange Commission, the U.S. Commodity Futures Trading Commission and the U.S. Department of Justice. It is too early to determine how much of the difference between the H15 Eurodollar figures and Libor could be due to manipulation of Libor.

Background Information on Input Data and Smoothing

The Federal Reserve H15 statistical release is available here:

The maximum smoothness forward rate approach to yield curve smoothing was described in this blog entry:

van Deventer, Donald R. “Basic Building Blocks of Yield Curve Smoothing, Part 10: Maximum Smoothness Forward Rates and Related Yields versus Nelson-Siegel,” Kamakura blog,, January 5, 2010.  Redistributed on on January 7, 2010.

 The use of the maximum smoothness forward rate approach for bond data is discussed in this blog entry:

van Deventer, Donald R. “Basic Building Blocks of Yield Curve Smoothing, Part 12: Smoothing with Bond Prices as Inputs,” Kamakura blog,, January 20, 2010. Redistributed on on January 21, 2010.

 The reasons for smoothing forward credit spreads instead of the absolute level of the libor-swap curve were discussed in this blog entry:

van Deventer, Donald R. “Basic Building Blocks of Yield Curve Smoothing, Part 13: Smoothing Credit Spreads,” Kamakura blog,, April 7, 2010. Redistributed on, April 14, 2010.

 The Kamakura approach to interest rate forecasting was introduced in this blog entry:

van Deventer, Donald R. “The Kamakura Corporation Monthly Forecast of U.S. Treasury Yields,” Kamakura blog,, March 31, 2010. Redistributed on on April 1, 2010.

 Today’s Kamakura U.S. Treasury Yield Forecast

The Kamakura 10 year monthly forecast of U.S. Treasury yields is based on this data from the Federal Reserve H15 statistical release:

The graph below shows in 3 dimensions the movement of the U.S. Treasury yield curve 120 months into the future at each month end:

These yield curve movements are consistent with the continuous forward rates and zero coupon yields implied by the U.S. Treasury coupon bearing yields above:

In numerical terms, forecasts for the first 60 months of U.S. Treasury yield curves are as follows:

The forecasted yields for months 61 to 120 are given here:

Today’s Kamakura Forecast for U.S. Dollar Interest Rate Swap Yields and Spreads

Today’s forecast for U.S. Dollar interest rate swap yields is based on the following data from the H15 Statistical Release published by the Board of Governors of the Federal Reserve System:

Applying the maximum smoothness forward rate smoothing approach to the forward credit spreads between the libor-swap curve and the U.S. Treasury curve results in the following zero coupon bond yields:

The forward rates for the libor-swap curve and U.S. Treasury curve are shown here:

The 10 year forecast for U.S. dollar interest rate swap yields is shown in the following graph:

The 10 year forecast for U.S. dollar interest rate swap spreads to U.S. Treasury yields is given in the following graph:

The numerical values for the implied future U.S. dollar interest rate swap spreads to U.S. Treasury yields are given here for 60 months forward:

The numerical values for the implied future U.S. dollar interest rate swap spreads to U.S. Treasury yields are given here for 61-120 months forward:

For more information about the yield curve smoothing and simulation capabilities in Kamakura Risk Manager, please contact us at  Kamakura interest rate forecasts are available in pre-formatted Kamakura Risk Manager data base format.

Andrew Sheahan, Donald R. van Deventer and Martin Zorn
Kamakura Corporation
Honolulu, August 26, 2011