Kamakura Releases 10 Year Monthly Forecast of U.S. Treasury Yields and Swap Spreads for March 2011

NEW YORK, March 15, 2011: Honolulu-based Kamakura Corporation on Tuesday released its forecast for U.S. Treasury yields and interest rate swap spreads monthly for the next 10 years. The forecast this month shows a dramatic twist in the path for forward 1 month Treasury bill rates.  Short term treasuries are predicted to rise steadily, resulting in a significant yield curve flattening by 2021 and the first indication of a downward sloping U.S. Treasury yield curve. U.S. dollar Libor-swap spreads to the U.S. Treasury curve also continue to imply short term Libor rates below the matched maturity U.S. Treasury yield for years into the future starting in 2018.

The Kamakura forecast for March shows 1 month Treasury bill rates rising steadily to 5.68% in February 2021, up 20 basis points from the peak forecasted last month. The 10 year U.S. Treasury yield is projected to rise steadily to 5.57% on February 28, 2021, 22 basis points lower than forecasted last month and 11 basis points lower than projected 1 month Treasury bill rates on the same date. The negative 18 basis point spread between 30 year U.S. dollar interest rate swaps and U.S. Treasury yields reflects the blurring of credit quality between these two yield curves.  The U.S. government is no longer seen as risk free, and 4 of the 20 panel banks that determine U.S. dollar libor are receiving significant government assistance and are, in effect, sovereign credits. For more on the panel members, see www.bbalibor.com. The negative 30 year spread results in an implied negative spread between 1 month libor and 1 month U.S. Treasury yields (investment basis) from 2018 to 2020.

Kamakura Chief Administrative Officer Martin Zorn said Tuesday, “In the last few days there has been a dramatic lowering of intermediate term forward rates and a sharp increase in the forward rates from 2018 to 2021.  This twist in the forward term structure is very dramatic.  We continue to think that market participants who understand and act on these dynamics will dramatically outperform those who ignore implied future yield movements.”

The projected flattening in the U.S. Treasury yield curve embedded in the Kamakura rate forecast is shown here:

The full text of the Kamakura forecast for U.S. Treasury yields and interest rate swap spreads is available each Friday afternoon on the Kamakura blog at this link:

http://www.kamakuraco.com/Blog/tabid/231/EntryId/265/March-11-2011-Friday-Forecast.aspx

The Kamakura interest rate forecasts are based on the forward interest rates embedded in the current U.S. Treasury yield curve and in the interest rate swap curve.  These forward rates are extracted using the maximum smoothness forward rate approach first published by Kamakura’s Donald R. van Deventer and Kenneth Adams in 1994 and modified in Financial Risk Analytics (1996) by Kamakura’s Imai and van Deventer. The maximum smoothness approach is applied directly to forward rates in the case of U.S. Treasury yields and it is applied to forward credit spreads, relative to the U.S. Treasury curve, in the case of the swap curve.

Kamakura’s rate forecast is available in electronic form, both in Kamakura Risk Manager table format and other forms, by subscription.  For more information contact Kamakura at [email protected].

About Kamakura Corporation

Founded in 1990, Honolulu-based Kamakura Corporation is a leading provider of risk management information, processing and software. Kamakura has taken Credit Technology Innovation Awards from Credit Magazine each year since 2008. In 2010, Kamakura was the only vendor to win 2 innovation awards, one each with distribution partners Fiserv and Thomson Reuters. Kamakura, along with its distributor Fiserv, was ranked number one in asset and liability management analysis and liquidity risk analysis in the RISK Technology Rankings in 2009. Kamakura Risk Manager, first sold commercially in 1993 and now in version 7.2, was also named in the top five for market risk assessment, Basel II capital calculations, and for “risk dashboard.” Kamakura was also ranked in the RISK Technology Rankings 2008 as one of the world’s top 3 risk information providers for its KRIS default probability service.  The KRIS public firm default service was launched in 2002, and the KRIS sovereign default service, the world’s first, was launched in 2008. KRIS default probabilities are displayed for 4000 corporates and sovereigns via the Reuters 3000 Xtra service and the Thomson Reuters Eikon service. Kamakura has served more than 200 clients ranging in size from $3 billion in assets to $1.6 trillion in assets. Kamakura’s risk management products are currently used in 33 countries, including the United States, Canada, Germany, the Netherlands, France, Austria, Switzerland, the United Kingdom, Russia, the Ukraine, Eastern Europe, the Middle East, Africa, South America, Australia, Japan, China, Korea and many other countries in Asia.

Kamakura has world-wide distribution alliances with Fiserv, Sumisho Computer Systems, Unisys, and Zylog Systems making Kamakura products available in almost every major city around the globe.

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