Kamakura Releases 10 Year Monthly Forecast of U.S. Treasury Yields and Swap Spreads for November, 2011

NEW YORK, November 14, 2011: Honolulu-based Kamakura Corporation on Monday released its forecast for U.S. Treasury yields and interest rate swap spreads monthly for the next 10 years.  The forecasted 1 month US Treasury bill rates decreased up to 44 basis points throughout the intermediate term but increased as much as 14 basis points from 2020 to 2021 compared to the previous forecast.

The Kamakura forecast for November shows 1 month Treasury bill rates rising steadily to 3.727% in October 2021, up 14.2 basis points from the peak forecasted last month. The 10 year U.S. Treasury yield is projected to rise steadily to 3.743% on October 31, 2021, 15.3 basis points lower than forecasted last month. The negative 24 basis point spread between 30 year U.S. dollar interest rate swaps and U.S. Treasury yields reflects the blurring of credit quality between these two yield curves.  The U.S. government has not been seen as risk free by the market for some time as evidenced by the negative spread, and 4 of the 19 panel banks that determine U.S. dollar libor are receiving significant government assistance and are, in effect, sovereign credits. For more on the panel members, see www.bbalibor.com. The negative 30 year spread results in an implied negative spread between 1 month libor and 1 month U.S. Treasury yields (investment basis) beginning in 2019 to 2021. 

Kamakura Chief Administrative Officer Martin Zorn said Monday, “The forward curve continues to reflect global uncertainty, specifically the concerns emanating from Europe, as well as the incorporation of Fed monetary actions. This can be clearly seen in the longer term flattening of the curve.”

The projected U.S. Treasury yield curve embedded in the Kamakura rate forecast is shown here:



The negative spread between interest rate swaps and US Treasuries implies a period of negative spreads between the Libor-swap curve and Treasuries and dramatic spread gyrations around mid-2012, as shown in this graph. This distortion comes about because the Libor Swap curve has two components with dramatically different credit risk. The short term rates are from the Libor market where in theory market participants can lose 100% of credit extended to banks.  In the swap market, however, losses can be no more than the difference in the net present value of the swap between the origination date and the default date. Market participants generally ignore this credit differential and that is what causes the gyrations below:



The full text of the Kamakura forecast for U.S. Treasury yields and interest rate swap spreads is available each Friday afternoon on the Kamakura blog at this link:

http://www.kamakuraco.com/Blog.aspx

The Kamakura interest rate forecasts are based on the forward interest rates embedded in the current U.S. Treasury yield curve and in the interest rate swap curve.  These forward rates are extracted using the maximum smoothness forward rate approach first published by Kamakura’s Donald R. van Deventer and Kenneth Adams in 1994 and modified in Financial Risk Analytics (1996) by Kamakura’s Imai and van Deventer. The maximum smoothness approach is applied directly to forward rates in the case of U.S. Treasury yields and it is applied to forward credit spreads, relative to the U.S. Treasury curve, in the case of the swap curve.  For a 50 year history of maximum smoothness forward rates, see Dickler, Jarrow and van Deventer (2011) “Inside the Kamakura Book of Yields: A Pictorial History of 50 Years of Daily U.S. Treasury Forward Rates” at this link:

http://www.kamakuraco.com/Portals/0/PDF/KamakuraYieldBook-ForwardRates-FinalVersion-20110913.pdf

For a summary of the shapes of forward rate curves that have prevailed over the 12,395 business days since January 2, 1962, see Dickler and van Deventer:

http://www.kamakuraco.com/Blog/tabid/231/EntryId/333/Inside-the-Kamakura-Book-of-Yields-An-Analysis-of-50-Years-Of-Daily-U-S-Treasury-Forward-Rates.aspx

Kamakura’s rate forecast is available in electronic form, both in Kamakura Risk Manager table format and other forms, by subscription. For more information contact Kamakura at info@kamakuraco.com.

About Kamakura Corporation
Founded in 1990, Honolulu-based Kamakura Corporation is a leading provider of risk management information, processing and software. Kamakura has taken Credit Technology Innovation Awards from Credit Magazine each year since 2008. In 2010, Kamakura was the only vendor to win 2 innovation awards, alongside two of Kamakura’s distribution partners. Kamakura, along with a distributer, was ranked number one in asset and liability management analysis and liquidity risk analysis in the RISK Technology Rankings in 2009. Kamakura Risk Manager, first sold commercially in 1993 and now in version 7.3, was also named in the top five for market risk assessment, Basel II capital calculations, and for “risk dashboard.” Kamakura was also ranked in the RISK Technology Rankings 2008 as one of the world’s top 3 risk information providers for its KRIS default probability service.  The KRIS public firm default service was launched in 2002, and the KRIS sovereign default service, the world’s first, was launched in 2008. Kamakura’s Non-Public Firm default probability service was launched in 2011. KRIS default probabilities are displayed for 4000 corporates and sovereigns via the Reuters 3000 Xtra service and the Thomson Reuters Eikon service. Kamakura has served more than 200 clients ranging in size from $1.5 billion in assets to $1.6 trillion in assets. Kamakura’s risk management products are currently used in 34 countries, including the United States, Canada, Germany, the Netherlands, France, Austria, Switzerland, the United Kingdom, Russia, the Ukraine, Eastern Europe, the Middle East, Africa, South America, Australia, Japan, China, Korea and many other countries in Asia.

Kamakura has world-wide distribution alliances with SCSK Corporation, Unisys, and Zylog Systems making Kamakura products available in almost every major city around the globe.


For more information contact

Kamakura Corporation
2222 Kalakaua Avenue, Suite 1400, Honolulu, Hawaii 96815
Telephone: 1-808-791-9888
Facsimile: 1-808-791-9898
Information: info@kamakuraco.com
Web site: www.kamakuraco.com