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”