The 10-year Treasury yield held steady at 1.19% yesterday (Aug. 4). The current rate marks the third time in recent history that the 10-year yield slipped to 1.19%, which reflects a six-month low.

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The Capital Spectator estimates the “fair value” of the 10-year Treasury yield by using the average estimate from three models:

• • Shevlin model, based on an article by Tom Shevlin, published in The Journal of Investment Management: “A Model of Bond Value: Explaining Yields With Growth and Inflation.” The model uses two inputs to estimate the fair value of the 10-year rate: 1) gross
    domestic product (GDP) and 2) inflation rate.
  • Frontier model, based on a research note published by Frontier Advisors: “Frontier’s Quantitative ‘Fair Value’ Bond Models.” The model uses three inputs to estimate the fair value of the 10-year rate: 1) US unemployment gap (difference between the unemployment rate and CBO’s estimate of the non-accelerating inflation rate of unemployment); 2) volatility of 10-year yield; and 3) momentum of 10-year Treasury yield.
  • BB model, based on an article published by Bloomberg: “Long-end bear-steepening signaled from Treasury yield scorecard.” The model uses five inputs to estimate the fair value of the 10-year rate:

* GDP growth
* year-over-year Consumer Price Index (headline)
* Federal Reserve assets as % of GDP
* Fed funds target rate
* 1-year/3-year curve to estimate Fed bias

For additional analysis on fair-value estimates of the 10-year yield, see these CapitalSpectator.com articles:

“Estimating Fair Value For The 10-Year Treasury Yield”
“Estimating Fair Value For The 10-Year Treasury Yield, Part II”
“Estimating Fair Value For The 10-Year Treasury Yield, Part III”

* US Covid-19 cases rebound to six-month high
* Federal Reserve vice chair says rate hike likely in 2023
* Are US jobless claims stuck at a permanently higher plateau?
* Global growth slipped to 4-month low in July via PMI survey data
* Global value of negative-yielding bonds rises to six-month high ($16.5 trillion)
* German factory orders rebounded more than expected in June
* ISM Services Index rebounded in July, reaching record high (since 1997)
* US firms hired substantially fewer workers than expected in July, ADP reports:

An extraordinary run of low risk persists for the Global Market Index (GMI), an unmanaged, market-value-weighted portfolio that holds all the major asset classes (except cash). After the benchmark posted another monthly gain in July, risk-adjusted performance ticked higher once again.

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* Biden administration issues new national eviction moratorium
* Delta variant poses biggest challenge for China since pandemic’s start
* Bond yields remain under pressure due to worries about Delta variant
* Businesses have record amounts of unused credit from US banks
* China economic growth accelerated in July via Composite Output Index
* Eurozone economy expanded in July at fastest rate since 2006
* UK inflationary pressures reach record high in July
* US factory orders rose more than expected in June:

Correction: Data table below is incorrectly labeled as June 2021; should be July 2021. Apologies

The projected risk premium for the Global Market (GMI) held steady in July at an annualized 6.0%, unchanged from the previous month.  That’s a comparatively elevated level vs. estimates in recent history. The forecast reflects the long-run outlook for GMI’s return over the “risk-free” rate, which is proxied with the yield on a 3-month Treasury bill.

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* Fed faces increasingly uncertain autumn due to Delta variant of coronavirus
* Asia’s economic recovery is increasingly vulnerable to Delta variant
* SEC chairman considers tougher regulations for crypto investing
* Global chip shortage that’s bedeviled car industry expected to continue
* Global Mfg PMI slipped in July but continues to indicate solid growth
* US mfg growth slowed for a second month in July via ISM survey data
* US construction spending edged up in June but trend still moving sideways
* US 10-Year Treasury yield fell to 1.20% on Monday–just above 6-month low:

Most of the major asset classes continued to rise in July, led by US real estate investment trusts (REITs). Only stocks in emerging markets lost ground last month.

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* Bipartisan Senate group finalizes text on infrastructure bill
* Dems ask White House to extend eviction ban
* US and UK say Iran responsible for deadly tanker attack off Oman’s coast
* Pandemic-driven slide in interest rates unleashes global boom in house prices
* World’s biggest pension fund cuts US bond weighting sharply to 35%
* Millions of jobless in US are set to lose support in a month
* Will the Fed change monetary policy due to soaring house prices?
* Revised Eurozone Mfg Index for July reflects ‘resilient’ output reading
* India Mfg Index returned to growth in July after brief contraction
* US 10yr-3mo Treasury yield curve continues to flatten:

The economic and financial headlines swirled last week, but the net result was essentially no change to a slight downside bias for performance with our proprietary strategies. As usual, the relatively calm surface activity at the strategy level masked a fair degree of turbulence in some corners for the underlying 16-fund opportunity set.

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