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

U.S. 10-Year Yields Set to Face Stronger Headwinds as Inflation Eases

By James PicernoBondsAug 11, 2023 07:56
ca.investing.com/analysis/us-10year-yields-set-to-face-stronger-headwinds-as-inflation-eases-200576627
U.S. 10-Year Yields Set to Face Stronger Headwinds as Inflation Eases
By James Picerno   |  Aug 11, 2023 07:56
Saved. See Saved Items.
This article has already been saved in your Saved Items
 
 
US10Y...
+0.09%
Add to/Remove from a Portfolio
Add to Watchlist
Add Position

Position added successfully to:

Please name your holdings portfolio
 

The 10-year Treasury yield continues to trade at a level well above CapitalSpectator.com’s fair-value estimate, but the gap suggests that further increases in the benchmark rate are facing stronger headwinds.

The 10-year rate closed at 4.09% yesterday (Aug. 10), modestly above the level when last month’s fair-value estimate was updated (3.86%). That compares with today’s average model estimate of 3.90% (as of July), which is slightly above the previous month’s estimate of 3.75%.

UST10Y Daily Chart
UST10Y Daily Chart

The model’s average estimate can be used as a forecasting tool for the market rate, but history reminds us that a gap will usually persist between the theoretical and actual yield through time.

The value of the model is that the gap (i.e., the model’s errors) varies semi-regularly around zero. In turn, that implies that the current gap will eventually narrow and then reverse, although the timing is highly uncertain.

10-Yr Treasury Yield vs Avg of 3 Fair Value Indicators Chart
10-Yr Treasury Yield vs Avg of 3 Fair Value Indicators Chart

The 10-year market rate continues to reflect a relatively wide premium over the fair-value estimate. The scenarios that will narrow the gap: are 1) a decline in the market rate, 2) a rise in the model estimate, and 3) a combination of both.

Although there’s no guarantee that the market will trade in line with the model’s estimate, history suggests it will, eventually, and that some degree of normalization from the current extreme is likely and overdue.

Reviewing the spread between the market rate less the average model estimate reflects an unusually high difference. In turn, that implies growing pressure that a narrowing will, at some point, unfold, leading to a reversal into negative terrain (market rate below average model estimate).

10-Yr Treasury Yield Less Fair Value Estimate
10-Yr Treasury Yield Less Fair Value Estimate

One scenario for expecting that the 10-year rate will move closer to the average model: inflation continues to ease. Although yesterday’s consumer inflation at the headline level ticked up in July for the one-year trend – the first increase in over a year – core CPI was steady, offering a somewhat more encouraging profile.

Some analysts advise that looking at the 3-month annualized change for core CPI offers a more reliable measure of recent inflation behavior and on that front disinflation is strengthening. Notably, the 3-month pace fell sharply to 3.1% in July, down from 5.0% previously.

Annual Rate of Change for Core CPI
Annual Rate of Change for Core CPI

“My God, that’s incredible,” says Laurence Meyer, a former Fed governor, of core CPI’s sharp decline for the 3-month change. “There’s absolutely no question that core inflation has turned the corner faster” than the Fed anticipated, he tells The Wall Street Journal.

Y-Parthenon senior economist Lydia Boussour also reads the latest inflation data as encouraging, telling Yahoo Finance: “The July CPI report offered more convincing evidence that inflation pressures are abating.”

U.S. 10-Year Yields Set to Face Stronger Headwinds as Inflation Eases
 

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....

U.S. 10-Year Yields Set to Face Stronger Headwinds as Inflation Eases

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