10-Year Treasury Yield: Gap to Fair Value May Continue to Shrink Further

Bonds Analysis by James Picerno covering: United States 10-Year. Read James Picerno's latest article on Investing.com

and a ‘fair value’ estimate calculated by CapitalSpectator.com continued to narrow in July. The market rate is still well above the model’s estimate, but as explained in recent months at 3.84%, which is close to the lowest level in more than a year.

What is clear is that the high spread, as predicted, has once again proven to be unsustainable. As in previous runs of a high market premium, a degree of normalizing has prevailed and will likely continue to prevail. The difference this time is that the normalizing remains slow, perhaps because of lingering aftershocks from pandemic-related factors.

The spread premium, in summary, continues to trend lower, albeit gradually and, at times, in fits and starts. Despite the recent decline, the spread still looks high relative to the historical record. But using history as a guide, it’s reasonable to expect that the still-wide difference between the market rate and the average model estimate will narrow further in the months ahead.

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