Kamakura Corporation announced its forecast Monday 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 5.19% in April, 2017 and the 10 year U.S. Treasury yield at 5.48% on April 30, 2020. 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. 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 February 2015. The projected movements in the U.S. Treasury yield curve are shown in the graph.
The Kamakura interest rate forecasts are based on the forward interest rates embedded in the current U.S. Treasury yield curve and interest rate swap curve. These forward rates are extracted using the maximum smoothness forward rate approach first published by Kamakuras Donald R. van Deventer and Kenneth Adams in 1994 and modified in Financial Risk Analytics (1996) by Kamakuras 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.
Kamakuras rate forecast is available in electronic form, both in Kamakura Risk Manager table format and other forms, by subscription.
D.C.