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
Treasury Rates
| Term | 6/28/2024 | Last Week | Last Month | Last Year |
|---|---|---|---|---|
| 1M Treasury | 5.34% | 5.31% | 5.40% | 5.23% |
| 2M Treasury | 5.36% | 5.37% | 5.41% | 5.34% |
| 3M Treasury | 5.37% | 5.37% | 5.43% | 5.35% |
| 4M Treasury | 5.38% | 5.38% | 5.42% | 5.43% |
| 6M Treasury | 5.33% | 5.36% | 5.43% | 5.49% |
| 1Y Treasury | 5.11% | 5.11% | 5.24% | 5.42% |
| 2Y Treasury | 4.72% | 4.73% | 4.98% | 4.87% |
| 3Y Treasury | 4.50% | 4.46% | 4.80% | 4.49% |
| 5Y Treasury | 4.30% | 4.27% | 4.64% | 4.13% |
| 7Y Treasury | 4.29% | 4.26% | 4.64% | 3.98% |
| 10Y Treasury | 4.29% | 4.26% | 4.62% | 3.84% |
Breakeven Rates
| Spot Term | 1m Forward | 2m Forward | 3m Forward | 4m Forward | 6m Forward | 1y Forward | 2y Forward |
|---|---|---|---|---|---|---|---|
| 1m | 5.38% | 5.42% | 5.48% | 5.39% | 5.43% | 5.33% | 5.35% |
| 2m | 5.39% | 5.42% | 5.37% | 5.29% | 5.21% | 4.97% | 4.79% |
| 3m | 5.40% | 5.36% | 5.31% | 5.22% | 5.12% | 4.83% | 4.59% |
| 4m | 5.36% | 5.32% | 5.25% | 5.16% | 5.06% | 4.74% | 4.48% |
| 6m | 5.28% | 5.23% | 5.16% | 5.08% | 4.85% | 4.63% | 4.35% |
| 1y | 5.11% | 5.05% | 4.98% | 4.91% | 4.78% | 4.32% | 4.06% |
| 2y | 4.72% | 4.67% | 4.62% | 4.57% | 4.48% | 4.19% | 4.08% |
| 3y | 4.51% | 4.47% | 4.44% | 4.41% | 4.35% | 4.16% | 4.02% |
| 5y | 4.32% | 4.30% | 4.28% | 4.27% | 4.24% | 4.13% | 4.12% |
| 7y | 4.31% | 4.30% | 4.29% | 4.28% | 4.26% | 4.17% | 4.17% |
| 10y | 4.32% | 4.31% | 4.31% | 4.30% | 4.29% | 4.23% | 4.26% |
Breakeven Change in Rate
| Spot Term | 1m Forward | 2m Forward | 3m Forward | 4m Forward | 6m Forward | 1y Forward | 2y Forward |
|---|---|---|---|---|---|---|---|
| 1m | 4.40 | 8.78 | 14.76 | 5.19 | 8.82 | -1.07 | 1.71 |
| 2m | 3.20 | 5.99 | 0.61 | -6.93 | -14.44 | -38.74 | -57.15 |
| 3m | 2.53 | -1.19 | -6.61 | -15.45 | -25.26 | -54.16 | -78.66 |
| 4m | -2.29 | -6.45 | -13.38 | -21.81 | -32.77 | -63.81 | -90.63 |
| 6m | -4.35 | -10.24 | -17.26 | -25.28 | -48.10 | -70.27 | -97.93 |
| 1y | -0.09 | -6.39 | -13.21 | -20.49 | -32.89 | -79.12 | -105.53 |
| 2y | 0.07 | -4.75 | -9.72 | -14.78 | -23.46 | -52.73 | -63.45 |
| 3y | 1.00 | -2.33 | -5.70 | -9.07 | -14.69 | -33.48 | -47.12 |
| 5y | 2.06 | 0.21 | -1.63 | -3.46 | -6.35 | -16.96 | -18.39 |
| 7y | 2.58 | 1.28 | -0.01 | -1.28 | -3.29 | -11.74 | -12.21 |
| 10y | 3.17 | 2.48 | 1.80 | 1.13 | 0.18 | -5.49 | -2.60 |
Analysis and Market Expectations
There seems to be some market consensus around rate cuts in the next 6-12 months. Interestingly, the longer duration treasuries (7-year and 10-year) do not appear to show any significant change over the next two years. For example, the 10-year rate, 2 years forward, is only 2.6 bps lower than the most recent spot rate. This could suggest that the market expects inflation to persist in the long run.
This seems a little counterintuitive, given that the market believes inflation will be reduced in the shorter term. It is important to remember that forward rates are implied, not guaranteed. Using forward rates to understand expected inflation is imperfect; many factors impact bond yields. However, it is interesting that we see this pattern.
Looking deeper at the numbers, the market seems to believe that the yield curve will start to smooth, but not entirely revert to normal. This indicates a cautious optimism about future economic conditions.
Predictions & Strategic Insight
Predicting market movements is always risky. However, in my opinion, the implied market sentiment is justified. While it is optimistic, it is notably less so than it was a year ago.
Conclusion
The analysis of forward rates and market sentiment offers valuable insights into how investors view future economic conditions. While the market anticipates some reduction in inflation in the short term, the long-term outlook remains cautious. This nuanced perspective highlights the complexity of predicting market trends and the importance of considering multiple factors in such analyses.
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.
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