Today’s forecast for U.S. Treasury yields is based on the May 27, 2010 constant maturity Treasury yields reported by the Board of Governors of the Federal Reserve System in its H15 Statistical Release reported at 4:15 pm May 28, 2010. 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 email@example.com.
The “forecast” for future U.S. dollar interest rate swap rates is derived from the maximum smoothness forward rate approach, but applied to the forward credit spread between the libor-swap curve and U.S. Treasury curve instead of to the absolute level of forward rates for the libor-swap curve.
Today’s forecast, unlike last week, represents a more normal implied pattern for yields after a ten basis point increase in 3 month libor and a 5 basis point rise in 6 month libor as reported by the Federal Reserve, accompanied by a jump in one year swap rates. This continues to imply a sharp rise and fall of spreads between the libor-swap curve and U.S. Treasuries around year end, but the libor-swap curve itself rises steadily over the same period. Movements in libor this week have made it apparent that collection methods used by the U.S. Federal Reserve for the H15 statistical release are different from the libor figures reported by the British Bankers Association on www.bbalibor.com. We look forward to reporting on these differences in the weeks ahead.
Today’s forecast shows an important change in future 1 month Treasury bill rates. Rather than peaking in June and July 2017 as forecasted last week, the implied forecast this week instead shows a steady rise in the 1month bill rate over the forecast horizon, ending up at 4.797 on April 30, 2020. The 10 year U.S. Treasury yield is projected to rise steadily also to reach 5.261% on April 30, 2020, 6 basis points above last week’s forecast.
The negative 16 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 is no longer seen as risk free. The U.S. dollar libor panel consists of 16 banks, and 4 of the 16 panel banks that determine U.S. dollar libor are receiving significant government assistance and are, in effect, sovereign credits. The current U.S. dollar libor panel members, last adjusted in May 2009, are the following banks:
- Bank of America
- Bank of Tokyo-Mitsubishi UFJ
- Barclays Bank PLC
- Citibank NA
- Credit Suisse
- Deutsche Bank AG
- JP Morgan Chase
- Lloyds Banking Group
- Norinchukin Bank
- Royal Bank of Canada
- Royal Bank of Scotland Group
- Societe Generale
- UBS AG
- WestLB AG
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 July, 2015, compared to December 2014 forecasted last week.
Background Information on Input Data and Smoothing
The Federal Reserve H15 statistical release is available here: http://www.federalreserve.gov/Releases/H15/Update/
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, www.kamakuraco.com, January 5, 2010. Redistributed on www.riskcenter.com 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, www.kamakuraco.com, January 20, 2010.
The reasons for smoothing forward credit spreads instead of the absolute level of the libor-swap curve was discussed in this blog entry:
van Deventer, Donald R. “Basic Building Blocks of Yield Curve Smoothing, Part 13: Smoothing Credit Spreads,” Kamakura blog, www.kamakuraco.com, April 7, 2010. Redistributed onwww.riskcenter.com, 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, www.kamakuraco.com, March 31, 2010. Redistributed on www.riskcenter.com 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 firstname.lastname@example.org. Kamakura interest rate forecasts are available in pre-formatted Kamakura Risk Manager data base format.
Donald R. van Deventer
Honolulu, May 28, 2010