SOURCE: Kamakura Corporation

Kamakura Corporation

February 14, 2011 10:00 ET

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

NEW YORK, NY--(Marketwire - February 14, 2011) - Honolulu-based Kamakura Corporation on Monday released its forecast for U.S. Treasury yields and interest rate swap spreads monthly for the next 10 years. The forecast this week is up substantially from last month in the intermediate maturities. Short term treasuries are predicted to rise steadily, resulting in a significant yield curve flattening by 2021. 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 2015.

The Kamakura forecast for February shows 1 month Treasury bill rates rising steadily to 5.48% in the January 2021, up 3 basis points from the peak forecasted last month. This masks the fact that the one month bill rate of 2.91% forecast for December 2013 has risen 60 basis points since last month's forecast. The 10 year U.S. Treasury yield is projected to rise steadily to 5.994% on January 31, 2021, 26 basis points higher than forecasted last month. The negative 23 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) beginning in 2015-2016 and again in 2019-2021. 

Kamakura Chief Administrative Officer Martin Zorn said Monday, "In just the last two weeks, we have seen increases of more than 63 basis points in the 1 month Treasury bill rates projected for 2013. The projected flattening in the Treasury yield curve is something for which all market participants should prepare. Even more important, the current yield curve has embedded in it 15-16 years of rising short term U.S. Treasury rates. If that implied forecast comes about, an entire generation of Americans will not experience falling U.S. Treasury bill rates."

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

The negative spread between interest rate swaps and US Treasuries implies an extended period of negative spreads between the Libor-swap curve and Treasuries and dramatic spread gyrations around mid 2011, as shown in this graph. This distortion comes about because the Libor Swap curve has two components with dramatically different credit risk. The short term rates are from the Libor market where in theory market participants can lose 100% of credit extended to banks. In the swap market, however, losses can be no more than the difference in the net present value of the swap between the origination date and the default date. Market participants generally ignore this credit differential and that is what causes the gyrations below:

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.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 info@kamakuraco.com.

About Kamakura Corporation

Founded in 1990, Honolulu-based Kamakura Corporation is a leading provider of risk management information, processing and software. 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 2000 corporates and sovereigns via the Reuters 3000 Xtra service. Kamakura has served more than 200 clients ranging in size from $1.4 billion in assets to $1.6 trillion in assets. Kamakura's risk management products are currently used in 34 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 (www.fiserv.com), Sumisho Computer Systems (http://www.scs.co.jp/english/), Unisys (www.unisys.com), and Zylog Systems (www.zsl.com) making Kamakura products available in almost every major city around the globe.

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