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.
Additionally, moving forward I will be using the Treasury rate information directly from Treasury.gov. In prior forward rate posts, I've used Refinitiv data from Microsoft Excel, but I noticed that the rates were not matching up to what the US Treasury is putting out. I do not believe that the Refinitiv data is inaccurate, the US Treasury data is just more accurate.
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 | 4.72% | 4.70% | 4.88% | 5.54% |
| 2M Treasury | 4.67% | 4.67% | 4.80% | 5.55% |
| 3M Treasury | 4.63% | 4.60% | 4.73% | 5.54% |
| 4M Treasury | 4.53% | 4.52% | 4.66% | 5.47% |
| 6M Treasury | 4.46% | 4.44% | 4.48% | 5.42% |
| 1Y Treasury | 4.42% | 4.34% | 4.27% | 5.26% |
| 2Y Treasury | 4.37% | 4.31% | 4.07% | 4.89% |
| 3Y Treasury | 4.32% | 4.27% | 4.03% | 4.62% |
| 5Y Treasury | 4.30% | 4.30% | 4.05% | 4.44% |
| 7Y Treasury | 4.35% | 4.36% | 4.14% | 4.46% |
| 10Y Treasury | 4.41% | 4.43% | 4.24% | 4.42% |
| 20Y Treasury | 4.67% | 4.70% | 4.58% | 4.73% |
Data from US Treasury website
Breakeven Rates
| Spot Term | 1m Fwd | 2m Fwd | 3m Fwd | 4m Fwd | 6m Fwd | 1y Fwd | 2y Fwd |
|---|---|---|---|---|---|---|---|
| 1m | 4.62% | 4.57% | 4.28% | 4.46% | 4.66% | 4.85% | 5.21% |
| 2m | 4.59% | 4.40% | 4.32% | 4.37% | 4.53% | 4.60% | 4.73% |
| 3m | 4.47% | 4.38% | 4.31% | 4.39% | 4.48% | 4.52% | 4.57% |
| 4m | 4.44% | 4.36% | 4.33% | 4.39% | 4.45% | 4.47% | 4.49% |
| 6m | 4.41% | 4.38% | 4.35% | 4.39% | 4.34% | 4.43% | 4.40% |
| 1y | 4.43% | 4.41% | 4.40% | 4.41% | 4.42% | 4.32% | 4.22% |
| 2y | 4.39% | 4.38% | 4.36% | 4.37% | 4.37% | 4.27% | 4.25% |
| 3y | 4.35% | 4.34% | 4.33% | 4.33% | 4.34% | 4.27% | 4.25% |
| 5y | 4.33% | 4.33% | 4.33% | 4.33% | 4.34% | 4.31% | 4.34% |
| 7y | 4.39% | 4.39% | 4.39% | 4.39% | 4.40% | 4.36% | 4.40% |
| 10y | 4.45% | 4.45% | 4.45% | 4.46% | 4.46% | 4.44% | 4.48% |
Breakeven Change in Rate (bps)
| Spot Term | 1m Fwd | 2m Fwd | 3m Fwd | 4m Fwd | 6m Fwd | 1y Fwd | 2y Fwd |
|---|---|---|---|---|---|---|---|
| 1m | -10.00 | -15.19 | -43.67 | -26.33 | -6.13 | 12.78 | 48.84 |
| 2m | -8.50 | -27.09 | -35.09 | -29.91 | -14.07 | -6.74 | 6.29 |
| 3m | -16.33 | -24.56 | -32.22 | -24.50 | -14.82 | -11.19 | -5.84 |
| 4m | -9.12 | -17.05 | -19.58 | -14.12 | -7.53 | -5.62 | -4.11 |
| 6m | -5.11 | -8.48 | -10.61 | -7.42 | -11.94 | -3.47 | -5.80 |
| 1y | 1.08 | -0.99 | -2.40 | -1.04 | 0.32 | -10.00 | -20.00 |
| 2y | 2.07 | 0.61 | -0.52 | -0.27 | -0.43 | -10.00 | -12.00 |
| 3y | 2.69 | 1.80 | 1.15 | 1.44 | 1.63 | -4.67 | -6.67 |
| 5y | 3.37 | 3.08 | 2.95 | 3.39 | 4.06 | 0.60 | 4.20 |
| 7y | 3.68 | 3.56 | 3.54 | 3.92 | 4.55 | 1.29 | 4.57 |
| 10y | 4.03 | 4.09 | 4.24 | 4.66 | 5.42 | 2.76 | 7.04 |
| AVG | -2.92 | -7.29 | -12.02 | -8.20 | -3.54 | -3.11 | 1.50 |
Analysis and Market Expectations
The Federal Reserve has made a significant amount of progress on inflation. Though inflation seems to be quite sticky around 2.3-2.5%, which is above the Feds speed limit.
The yield curve has certainly flattened since last year. Interestingly, long-term rates are still high.
Short-Term Expectations
- The 1-month forward rates show a mix of positive and negative changes, suggesting some short-term uncertainty or volatility.
- The 1-month spot rate is expected to drop by 2.92 basis points on average across all maturities.
Medium-Term Expectations
- The 6-month forward rates exhibit similar drops to short-term expectations.
- The average drop in the 6-month forward rates is -3.54 bps, indicating a less pronounced expectation of rate decreases in the medium term compared to a few months ago.
Long-Term Expectations
- Forward rates for 1-year and 2-year terms show a missed bag. For instance, the 1-year forward rate is expected to drop by 3.11 bps one year from now, but the 2-year shows an increase by 1.5 bps.
Conclusion
The forward rate changes imply a moderate changes in interest rates across various maturities. This indicates the market believes rates will stay higher for longer with little chance of an increase.
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.
Works Cited
"Interest Rate Statistics." U.S. Department of the Treasury, https://home.treasury.gov/policy-issues/financing-the-government/interest-rate-statistics. Accessed 6 July 2024.
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.
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