Kamakura Corporation on Monday announced its forecast for U.S. Treasury yields and interest rate swap spreads monthly for the next 10 years. Todays forecast shows 1 month Treasury bill rates peaking at 4.67% in the fourth quarter of 2017, down 52 basis points from the April 2017 peak of 5.194% predicted in May. The 10 year U.S. Treasury yield is projected to rise steadily to 5.115% on May 31, 2020, 37 basis points lower than forecasted last month. The negative 20 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, 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 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 April 2015 and persisting through October 2019.
Kamakura founder Dr. Donald R. van Deventer reacted to the forecast by saying, We regard the implied negative spreads between the libor-swap curve and U.S. Treasuries as the Disneyland of fixed income arbitrage. Kamakura believes that the market participants with the best understanding of the nature and causes of these anomalies will reap significant rewards.
D.C.