Understanding the Yields on Treasury Bills

When it comes to investing in government securities, Treasury bills (T-bills) are one of the most popular choices. T-bills are short-term debt obligations issued by the US government and carry no default risk. Likewise, disparities between the rates paid on T-bills and those paid on CDs have also increased. In November 2022, the federal funds rate was near zero and the one-year T-bill yield was 0.04%. But as investors fear recession, the rate curve can invert with shorter-duration bonds yielding more than longer ones. That is exactly what is happening right now as the one-year T-bill yield, TMUBMUSD01Y, 4.694% is higher than the 10-year note yield, TMUBMUSD10Y, 1.849%.

An almost 5% level on the one-year T-bill yield TMUBMUSD01Y, 4.694% could eventually spill over into other rates, such as the two-year, three-year and five-year notes. The budget assumes 91-day Treasury bills will average 0.9% and 10-year Treasury notes will average 2.5% in fiscal 2023. Those rates are much higher than the current market yields of 0.02% and 1.8%, respectively. While the market yields are much lower, the budget rates are based on historical averages.

The most likely range for the 3-month U.S. Treasury bill yield in ten years is between 1% and 2%. This range is determined by a simulation of the current market yield and the future yield of the 3-month Treasury bill, which is based on Robert Jarrow's book. Forward rates contain a risk premium that takes into account the expected changes in the yield curve. Therefore, the yield of the 3-month bill in the future will be determined by the market conditions at the time.

The same is true for interest rates. In this section we present the detailed probability distribution for both the 3-month Treasury bill rate and the 10-year note rate. The probability distribution is calculated by simulating the future market conditions and the yield of the 3-month and 10-year Treasury bills. The simulation shows that the most likely range for the 3-month U.S. Treasury bill yield in ten years is from 1% to 2%. There is a 25.41% chance that the 3-month yield will be within this range.

Treasury yields are essentially the rate of interest earned on US government debt. They are often used to gauge the overall health of the US economy. As the yield rises, it is an indication that the US economy is doing well, and investors are willing to lend their money to the government. On the other hand, when yields fall, it is an indication that investors are fearful of a recession, and they are not willing to lend their money to the government.

This week's simulation shows that the most likely range for the 3-month U.S. Treasury bill yield in ten years is from 1% to 2%. There is a 25.41% chance that the 3-month yield will be within this range. This means that the yield of the 3-month Treasury bill will likely remain low for the foreseeable future. This is good news for investors looking for low-risk investments.