Over a year ago, I delved into the fascinating world of Treasury forward rates, sharing my insights and analyses in a blog post. The positive response and my passion for this subject have inspired me to make it a recurring feature on my blog. In this post, I will provide an in-depth breakdown of the implied forward rates and breakeven rates across various time horizons, offering valuable insights for those interested in the intricacies of Treasury markets.
If you want to better understand forward rates and how they are calculated, please see this blog post I wrote about it.
Understanding Key Concepts
Forward Rates: These are interest rates implied by the current yield curve for periods of time in the future. Essentially, they represent what the market expects interest rates to be in the future.
Breakeven Rates: These are the rates at which the cost of holding a security “breaks even” with the expected future rate. They provide insight into the market's inflation expectations and interest rate predictions.
Breakdown of Implied Forward Rates
| Forward Rate Horizon | Spot Rate | Breakeven Rate | Breakeven Difference (bps) |
|---|---|---|---|
| 6-month rate, 6 months forward | 5.34% | 4.74% | -60.27 |
| 6-month rate, 1 year forward | 5.34% | 4.61% | -73.67 |
| 1-year rate, 1 year forward | 5.06% | 4.31% | -75.13 |
Explanation
It seems like the market is pricing in at least one rate cut before the end of the year, and the potential for an additional cut in the first half of 2025. This is a lot less optimistic than a year ago and seems to be more in-line with what the Federal Open Market Committee (FOMC) dot plot indicates.
While we have seen inflation come down, it’s still been sticky. The Federal Reserve needs to be sure that inflation does not rebound the minute rate cuts are announced. The Federal Reserve’s inflation target is 2%, and we will likely continue to see a very hawkish demeanor.
Predictions & Strategic Insight
I am not in the business of predicting rate cuts, but I believe that we will see elevated rates for the rest of the year. I could see a scenario where the CPI comes down closer to 2.5%, and we see the Fed do a single rate cut in 2024. But if inflation continues to be sticky, I expect rates to stay elevated.
Conclusion
The Treasury market is providing clear signals about future rate expectations, influenced by current economic conditions and Federal Reserve policies. Staying informed about these trends can help investors make better strategic decisions.
For more detailed analysis and ongoing updates, make sure to check back regularly on my blog. If you have any questions or need further clarification on any points, feel free to leave a comment or reach out directly.
Yield curve as of 6/16/2024
Works Cited
Board of Governors of the Federal Reserve System (U.S.). "June 12, 2024: FOMC Projections materials, accessible version." Federal Reserve, 12 June 2024, https://www.federalreserve.gov/monetarypolicy/fomcprojtabl20240612.htm.
U.S. Bureau of Labor Statistics. "Consumer Price Index Summary - May 2024." Bureau of Labor Statistics, 12 June 2024, https://www.bls.gov/news.release/cpi.nr0.htm.
Disclaimer: The information provided in this blog post is for educational and informational purposes only. It should not be construed as financial advice or a substitute for professional financial guidance. Everyone's financial situation is unique, and readers are encouraged to consult with a qualified financial advisor or planner before making any financial decisions.
Additionally, AI technology was utilized to edit and optimize this post for clarity and readability.
Add comment
Comments