Monday, April 5, 2010

Bond Markets Predicting An Almost Doubling Of The 5 Year Treasury Rate

The US Treasury Bond Market, as of 2:00 PM in NY, is predicting an almost doubling of the interest rate on future 5-year US Treasury Bonds.

Bloomberg reported yields show the 10-year Treasury yield at 4.00 percent and the 5-year Treasury yield at 2.75 percent.

The market is expecting 5-year US Treasury Bond yields to jump to 5.27 percent. Rates are expected to rise by more than 2.5 percent, or almost double the current rate.

The market expectation of the 5-year bond interest rate after the maturity of the current 5-year US Treasury bond can be derived from the yields on the current 5 and 10-year bonds.

The 10-year yield is the average of the yield of the current 5-year Treasury bond and the expected yield of a 5-year Treasury bond issued at the maturity of the current five year bond for the remaining 5 years until the end of the term of the current 10-year Treasury bond.

Similar types of calculations can also be computed for inflation from the Treasury Inflation bonds (TIPS) and the regular US Treasury Bonds.

The inflation rate for the next five years is expected to average around 2.2 percent and then rise to an average 2.3 percent for the following five years.

The modest change in expected inflation shows that the increase in future interest rates will mostly come from an increase in the real rate of interest. The real rate of interest is expected to rise from the current .52 percent to around 2.37 percent, as the Federal Reserve stops artificially keeping short-term interest rates low, and as the economy recovers.

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