Modeling Attractiveness of U.S. Treasuries

Given anxiety among investors about the rapid rise of U.S. public debt, are U.S. Treasuries fairly valued? In his July 2024 paper entitled “A Historical Perspective on US Treasuries Risk Premia”, Olivier Davanne describes factors driving the U.S. Treasuries yield curve and explains how to gauge beliefs of market participants. He extracts investor rate expectations for various horizons from the monthly Consensus Economics surveys and the quarterly Surveys of Professional Forecasters to support a model of U.S. Treasury premiums based on eight variables, four related to monetary policy (current and expected) and four related to risk pricing (current and expected), as follows:

1. Current short-term yield.
2. Expected equilibrium short-term yield.
3. Short-term yield expected in one year.
4. Short-term yield expected in three years.
5. Current short-term risk premium for 10-year U.S. Treasury notes (T-note).
6. Expected long-term equilibrium for the T-note risk premium.
7. As an indication on the expected speed of convergence between them, expected T-note risk premium in three years.
8. As a measure of monetary policy risk premium, current risk premium on 1-year U.S. Treasury notes.

Applying a standard statistical procedure to the current Federal Funds Rate, yields for 3-month, 6-month, 1-year, 2-year, 5-year and 10-year U.S. Treasury instruments and responses to the above-cited surveys during 1994 through early 2024, he finds that:

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