The “fair value” estimate for the remained relatively steady in August while the average level of the actual benchmark rate in the market continued to ease. As a result, the market premium for the 10-year yield dipped to the lowest level in nearly a year last month.
The downside bias in the market premium -– actual yield less the fair-value estimate — has accelerated lately, fueled by firmer expectations that the Federal Reserve will cut interest rates at its Sep. 17 policy meeting.
The average fair-value estimate for August: 3.77%, or roughly 49 basis points below the monthly average for the actual 10-year Treasury yield. This market premium has remained in a tight range in recent months despite elevated concerns that tariffs are starting to lift . Labor market data in recent weeks, by contrast, reflect a slowing , which is putting downside pressure on yields.
The market premium for the 10-year yield has held in a relatively tight range this year after spiking higher in 2023. At one point that year, the spread reached nearly 139 basis points, the highest in three decades. But as discussed in these updates, the historical record suggested that the spread would eventually normalize, which is what’s been unfolding for much of this year. On that basis, the expectation for normalization serves as the basis for a forecast of the 10-year yield.
The long-term average spread (since 1980) is +15 basis points. Since 2020, the spread is slightly higher at +17 basis points. Those readings suggest that the current spread of +49 basis points could edge lower in the months ahead.
Recent market action suggests as much. The US 10-year Treasury yield fell to 4.03% yesterday (Sep. 10), the lowest since April.
The market has become increasingly focused on the labor market, which is showing signs of slowing. US rose last week to the highest level in near four years – news that continued to weigh on Treasury yields on the expectation that it strengthens the case for .
Notably, the rise in jobless claims received more attention by the bond market yesterday over the news that consumer inflation’s 1-year trend in August rose to the highest pace since January, which implies lower odds for a rate cut.
“Today’s report has been trumped by the jobless claims report,” wrote Seema Shah, chief global strategist at Principal Asset Management. “While the report is a tad hotter than expected, it will not give the Fed a moment of hesitation when they announce a rate cut next week. If anything, the jump in jobless claims will inject a bit more urgency in the Fed’s decision-making, with Powell likely signaling a sequence of rate cuts is on the way.”