Breaking News
Get 40% Off 0
👀 Reveal Warren Buffett's stock picks that are beating the S&P 500 by +174.3% Get 40% Off

Has the 10-Year Yield Peaked? Fair-Value Model Says Yes, but Market Says No

By James PicernoBondsSep 15, 2023 07:54
ca.investing.com/analysis/has-the-10year-yield-peaked-fairvalue-model-says-yes-but-market-says-no-200579587
Has the 10-Year Yield Peaked? Fair-Value Model Says Yes, but Market Says No
By James Picerno   |  Sep 15, 2023 07:54
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
US10Y...
-0.54%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

The US 10-year Treasury yield continued to trend higher in August, rising further above CapitalSpectator.com’s “fair-value” estimate, which is based on averaging three models.

It’s unclear if the mean estimate is wrong or if the market’s experiencing an extended run of irrational exuberance. Perhaps it’s a bit of both. In any case, the widening spread in the market yield over the model’s estimate is striking from a historical perspective.

The 10-year rate in August marked a full month of 4.0%-plus yields—the highest sustained run at or above that mark since 2008 (black line in the chart below). By contrast, the average fair-value estimate via three models remains below 3% (red line).

10-Yr Yield vs Fair Value Model Estimates
10-Yr Yield vs Fair Value Model Estimates

The spread in the market rate over the average estimate for the three models rose to 1.42 percentage points last month. That’s up modestly from July and also marks the highest spread since 1994, as shown in the next chart below.

10-Yr Yield Less Fair Value Model Estimates
10-Yr Yield Less Fair Value Model Estimates

Spreads at the current level, or higher, aren’t unprecedented, although we haven’t seen this level of divergence for several decades. What’s more, relatively wide spreads can persist for several years. But as the spread chart reminds us, eventually the market rate moves closer into alignment with the average fair value estimate, quite often overshooting to the opposite extreme. Timing, however, is uncertain.

Notably, the spread varies around the mean estimate randomly, which implies that extreme variations will “correct” eventually and that the average estimate provides useful if not timely information. That suggests a couple of takeaways from the current market/fair value mismatch.

First, the current market yield appears to offer a relatively attractive opportunity for buy-and-hold investors. Second, the unusually high premium in the current market yield vs. the average estimate suggests that further increases in the 10-year rate face headwinds.

The caveat, of course, is that the market can remain irrational for longer than you can remain liquid. To be fair, another interpretation is that the modeling is simply wrong, and the crowd is correctly pricing in higher yields because economic and/or inflation conditions warrant that pricing.

Pick your poison. I still favor the view that the 10-year rate is at/near a peak. But Capital Spectator has been saying that for several months and the market continues to ignore the advice. Hope (and confidence in the model) spring eternal.

Has the 10-Year Yield Peaked? Fair-Value Model Says Yes, but Market Says No
 

Related Articles

ING Economic and Financial Analysis
A Structural ECB Bond Portfolio to Benefit EGBs By ING Economic and Financial Analysis - Feb 27, 2024

By Benjamin Schroeder Overall, we think the bearish sentiment can keep going in the near term. For markets, the main focus remains on the assessment of the US macro backdrop, with...

TrackInsight
A Difficult Start to the Year for Bond Markets By TrackInsight - Feb 19, 2024

With a Labor Department report showing U.S. consumer prices increased more than expected in January amid rises in the costs of shelter and healthcare, the week did not allow U.S....

Has the 10-Year Yield Peaked? Fair-Value Model Says Yes, but Market Says No

Add a Comment

Comment Guidelines

We encourage you to use comments to engage with users, share your perspective and ask questions of authors and each other. However, in order to maintain the high level of discourse we’ve all come to value and expect, please keep the following criteria in mind: 

  • Enrich the conversation
  • Stay focused and on track. Only post material that’s relevant to the topic being discussed.
  • Be respectful. Even negative opinions can be framed positively and diplomatically.
  •  Use standard writing style. Include punctuation and upper and lower cases.
  • NOTE: Spam and/or promotional messages and links within a comment will be removed
  • Avoid profanity, slander or personal attacks directed at an author or another user.
  • Don’t Monopolize the Conversation. We appreciate passion and conviction, but we also believe strongly in giving everyone a chance to air their thoughts. Therefore, in addition to civil interaction, we expect commenters to offer their opinions succinctly and thoughtfully, but not so repeatedly that others are annoyed or offended. If we receive complaints about individuals who take over a thread or forum, we reserve the right to ban them from the site, without recourse.
  • Only English comments will be allowed.

Perpetrators of spam or abuse will be deleted from the site and prohibited from future registration at Investing.com’s discretion.

Write your thoughts here
 
Are you sure you want to delete this chart?
 
Post
Post also to:
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Thanks for your comment. Please note that all comments are pending until approved by our moderators. It may therefore take some time before it appears on our website.
 
Are you sure you want to delete this chart?
 
Post
 
Replace the attached chart with a new chart ?
1000
Your ability to comment is currently suspended due to negative user reports. Your status will be reviewed by our moderators.
Please wait a minute before you try to comment again.
Add Chart to Comment
Confirm Block

Are you sure you want to block %USER_NAME%?

By doing so, you and %USER_NAME% will not be able to see any of each other's Investing.com's posts.

%USER_NAME% was successfully added to your Block List

Since you’ve just unblocked this person, you must wait 48 hours before renewing the block.

Report this comment

I feel that this comment is:

Comment flagged

Thank You!

Your report has been sent to our moderators for review
Continue with Google
or
Sign up with Email