Bonds Analysis by James Picerno covering: United States 10-Year. Read James Picerno's latest article on Investing.com
was steady in April while the market level for the benchmark rate continued to rise well above the theoretical level. But trading activity this month suggests the trend may be shifting. Yesterday’s sharp fall in the 10-year yield substantially narrowed the spread, which implies that the market’s premium over fair value had become extreme.news for April, the 10-year yield fell on Wednesday to a six-week low of 4.34%. The slide marks a hefty reversal after this rate climbed to 4.
As a result, the market level looked unsustainable without a dramatic change in the macro fundamentals, such as a sharp rise in inflation. In fact, disinflation, although it stalled recently, persists. In other words, the market premium baked into the 10-year yield remained lofty last month. Although such extremes aren’t unprecedented, they tend to be relatively short-lived, or so history suggests. As the next chart below reminds, premiums tend to reverse eventually.
The thesis on these pages has long been that while the market can maintain a relatively large yield premium for an extended period, the much lower fair-value estimate will likely restrain the crowd from bidding up the 10-year rate beyond its recent peak. That is, unless macro data changes to a degree that materially lifts the fair-value estimate.
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