Implications from the Treasury Yield Curve
Courtesy of scriabinop23
Here is a derivation of implied 1 year forward rates on treasuries. A 1 year treasury forward is close enough (for government work) to get an idea of when the market projects the Fed will start moving rates upward. If you imply the Fed responds with hikes because a recovery is already happening, this data tells a little more where general sentiment is at.
For the sake of robustness, I purposefully designed this to work with very few input points, necessitating a basic a smoothing mechanism. From this, there is a small amount of error, but nothing meaningful.
The obvious interpretation here is that the treasury markets as of today do not project a meaningful recovery will start until 2012, with the end of cycle not happening until 2017. Post 2017, I’ll venture to say 25 basis points of 1 year treasury forward movement per year is not actually projected Fed Funds policy change, but instead accounting for normal upward sloping yield curve behavior, where investors want to be paid extra for taking more interest rate risk from longer duration bonds.
And a snapshot of the treasury curve from November 2006, the “golden age” of securitization:
For more analysis, go to http://scriabinop23.blogspot.com.
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