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Why have far-forward nominal Treasury rates increased so much in the past few years? Old risks reemerge in an era of Fed credibility, Accessible Data
Figure 1. Levels and Five-Year Changes in Far-Forward (9-10 Year) Nominal Treasury Rates
This figure consists of two panels side by side.
Left Panel: This panel shows the nominal 9-10 year forward rate from smoothed yield curves over time. The x-axis represents years from approximately 1970 to 2025. The y-axis shows the rate percentage, ranging from about 2% to 16%. The line graph depicts significant fluctuations in the forward rate over time, with notable peaks in the early 1980s reaching around 16%, and more recent values hovering around 4-6%.
Right Panel: This panel displays 20-quarter rolling changes in the 9-10 year forward rate. The x-axis covers the same time period as the left panel. The y-axis shows the change in percentage points, ranging from approximately -8% to +8%. The line graph shows periods of both positive and negative changes, with the most extreme positive changes occurring in the late 1970s and early 1980s, with another large increase in the last five years.
Notes: The left panel depicts the nominal 9-10 year forward rate from smoothed yield curves. The right panel depicts 20-quarter rolling changes in the 9-10 year forward rate.
Source: FRB-NY.
Figure 2. Far-Forward Expected Inflation and Real Interest Rates
This figure consists of two panels side by side.
Left Panel: This panel shows two measures related to long-run inflation expectations. The x-axis represents years from around 1970 to 2025. The y-axis shows the percentage, ranging from about 0% to 10%. There are two lines on the graph:
A thin black line labeled "pi-star" from the FRB/US model, which starts around 1990 and remains relatively stable between 2% and 3%.
A thick red line showing 9-10 year forward inflation compensation, which starts later and shows more variation.
Right Panel: This panel depicts estimates of the "neutral" real interest rate (r-star). The x-axis covers the same time period as the left panel. The y-axis shows the percentage, ranging from about -1% to 7%. There are three lines on the graph:
A thick red line showing the Holston, Laubach, and Williams (HLW) estimate, which shows a general downward trend over time. A second line, in dotted blue, representing a survey-based estimate from the BlueChip survey shows a similar trend, but in contrast to HLW, it increases some in the last two years of the sample. Similarly, a thin black line from a statistical model of the trend in short-term real rates shows a downward trend over time and a small increase over the last few years of the sample.
Notes: The left panel depicts in thin black variable “PTR”, labeled “pi-star” from the public variable file from FRB/US at the Federal Reserve Board website. (Data for 2025:Q2-Q3 is imputed from the Survey of Professional Forecasters). Plotted in thick red is 9-10 year forward inflation compensation derived from smoothed nominal and inflation-protected Treasury securities. The right panel depicts estimates of r-star from Holston, Laubach and Williams (2017), thick red line, and survey-based estimate from the BlueChip survey, dotted blue, and a purely statistical model of the trend in short term real rates, thin black.
Sources: Survey of Professional Forecasters, BlueChip survey, Federal Reserve Board of Governors, FRB-NY.
Figure 3. Decomposition of Far-Forward Nominal Rates
This figure shows a single graph decomposing far-forward nominal rates. The x-axis represents years from 1970 to 2025. The y-axis shows the rate in percentage, ranging from about 0% to 16%. There are three main elements on the graph:
A black line labeled "pi-star + r-star", which represents the sum of long-run expected inflation and the neutral real interest rate.
A red line representing the total risk premium. This line shows considerable variation over time, reaching high levels in the early 1980s and showing an upward trend in recent years.
A blue dotted line showing the real risk premium, which is the red line with the inflation risk premium subtracted. It begins in 2000 and shows a similar pattern to the red line, lying almost on top of the red line over the past two years.
Notes: The thin black line depicts the sum of the PTR variable, labeled “pi-star” from the public variable file from FRB/US at the Federal Reserve Board website and median of the estimates of far-forward expected real short rates shown Figure 2. Data for pi-star for 2025:Q2-Q3 is imputed from the Survey of Professional Forecasters. The thick red line depicts the difference between the nominal 9-10 year forward rate and the sum, pi-star+r-star. The dotted blue line additionally subtracts off the inflation risk premium, measured as far-forward inflation compensation minus pi-star (see Figure 2).
Sources: Survey of Professional Forecasters, Federal Reserve Board of Governors, FRB-NY.
Figure 4. Estimated Supply and Demand Shocks and Expected Shock Volatility
This figure consists of four panels arranged in a 2x2 grid.
Top Left Panel: This panel shows estimated supply shocks over time. The x-axis represents years from 1970 to 2025. The y-axis shows the magnitude of the shocks. The graph shows both positive and negative supply shocks, with notable negative shocks during the recessions of the 1970s and early 1980s, and again during the 2020 recession.
Bottom Left Panel: This panel shows estimated demand shocks over the same time period. The layout is similar to the top left panel. It shows significant negative demand shocks during most recessions, particularly during the 2008 financial crisis and the 2020 recession.
Top Right Panel: This panel displays the expected volatility of supply shocks over time, based on a GARCH model. The x-axis covers the same time period as the left panels. The y-axis shows the level of expected volatility. The graph shows peaks in volatility during the late 1970s and early 1980s, followed by a long period of low volatility, and then an increase in volatility around 2020.
Bottom Right Panel: This panel shows the expected volatility of demand shocks, using a similar format to the top right panel. It shows spikes in volatility during most recessions, with particularly high volatility during the 2008 financial crisis and the 2020 recession.
All panels have blue shaded areas indicating NBER-defined recessions throughout the time period. December 1969–November 1970, November 1973–March 1975, January 1980–July 1980, July 1981–November 1982, July 1990–March 1991, March 2001–November 2001, December 2007–June 2009, and February 2020–April 2020.
Notes: The panels on the left depict the estimated supply and demand shocks from Engstrom (2025). The panels on the right depict GARCH-based estimates of the expected volatility of supply and demand shocks. NBER-defined recessions are shaded in blue.
Sources: NBER, Federal Reserve Board of Governors.
Figure 5. Actual Debt-to-GDP and CBO Projection
This figure shows actual and projected U.S. debt-to-GDP ratios. The x-axis represents years from 1970 to 2035. The y-axis shows the debt-to-GDP ratio as a percentage, ranging from 0% to 120%.
The graph contains several elements:
A solid black line representing the actual debt-to-GDP ratio from 1970 to around 2025. This line shows a general upward trend, with a sharp increase during the 2008 financial crisis and another significant rise around 2020.
Three colored lines representing different vintages of CBO 10-year debt-to-GDP projections:
A green dashed line starting around 2015, projecting a relatively stable debt-to-GDP ratio. A blue dotted line starting around 2020, projecting a higher debt-to-GDP ratio. A red line starting around 2025, projecting the debt-to-GDP ratio to reach nearly 120% by 2035.
The graph illustrates how projections for future debt levels have become increasingly pessimistic over time, with the most recent projection showing a steep upward trajectory for the debt-to-GDP ratio.
Notes: The black line shows actual levels for U.S. Treasury debt held by the public as reported by the Congressional Budget Office (CBO). Also plotted are three vintages of CBO 10-year debt-to-GDP projections from 2015, 2020, and 2025 in green, blue, and red, respectively.
Source: CBO.