The market premium for the US Treasury yield remained mostly unchanged in May vs. a “fair value” estimate. As the 10-year yield continued to trade in a tight range last month, combined with virtually no change an model-based assessment of its fair value, today’s update for May is in line with the previous month’s analysis.
The current average monthly fair-value estimate is 3.72%, which remains moderately below the actual 10-year yield. In yesterday’s trading, the benchmark rate was 4.43% (June 11), a middling level vs. recent history. The spread for the market level vs. fair-value estimate edged up 70 basis points, which is also a middling level year to date. The fair value estimate is calculated as the mean via three models.
The market premium continued to hold in the 50-100 basis point range, which has prevailed so far in 2025. The relatively steady trend reflects uncertainty about how tariffs will influence inflation in the months ahead and how the Federal Reserve will change monetary policy, based on trade tensions.
Meantime, investors are demanding a moderate yield premium over a theoretical fair value of the benchmark rate — a premium that’s fallen sharply vs. heights reached a few years ago, when inflation was surging.
Yesterday’s consumer inflation report for May, by comparison, was muted. The year-over-year change for CPI at the headline level ticked down to 2.4%, moderately above the Fed’s 2% inflation target. Core CPI, a more robust measure of the trend, held steady, which could be a sign that pricing pressure will remain “sticky” at a time when tariffs are only just starting to factor into prices.
“It was a very good report,” said Mark Zandi, chief economist at Moody’s. “Basically, it says inflation has finally gotten back to the Federal Reserve’s annual inflation target.” He added: “I think it’s the calm before the inflation storm. This [report] still reflects the disinflation that began a few years ago and continued on through the month of May.”
“We’re not really seeing much of the pass-through, if some at all, from the tariffs,” advised RSM chief economist Joe Brusuelas. “That really did provide the much softer print than I expected or many analysts. But don’t get too comfortable. When [companies] hike prices by 10% to 15%, it gets passed through eventually.”