The 10-year US Treasury yield fell further in May. Unofficial Fed data suggest that most of this year’s big decline has been due to a drop in the real yield, and that the rally has reflected a collapse in the term premium. Expectations of the future path of short-term Treasury yields – or interest rates, assuming negligible credit risk – over the next decade have actually risen. This suggests that while some market participants may have revised down their estimate of the average real federal funds rate over the longer term – as suggested in the minutes of the FOMC’s late-April meeting – they are a minority.
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