Signal as of January 2026: Cheap / Undervalued (+0.36pp vs. fair value) | R² = 0.877 | Updated April 08, 2026
This model estimates the 10-year Treasury yield as a linear function of two Fed policy stance variables, calibrated by OLS regression over the full historical sample.
DGS10 = α + β₁·DGS2 + β₂·PolicySpread + β₃·TaylorGap
| Regressor | Definition | Coeff. | Interpretation |
|---|---|---|---|
| α | Intercept | +1.970 | Structural level offset |
| DGS2 | 2-Year Treasury yield | +0.655 | Market pricing of short-rate path (level anchor) |
| PolicySpread | DGS2 − FEDFUNDS | +0.538 | Hike expectations (+) / cut expectations (−) |
| TaylorGap | FEDFUNDS − Taylor Rule rate | +0.148 | Hawkish vs. rule (+) / dovish vs. rule (−) |
Taylor Rule: r = 2.5 + π + 0.5·(π − 2.0) − 1.0·(UNRATE − NROU), where π = Core PCE YoY and NROU = CBO natural rate of unemployment.
Model fit: R² = 0.877 | In-sample RMSE = 0.53pp | Sample: Dec 1995 – Jan 2026
Residual = Actual − Fair Value. Mean-zero by OLS construction.
Positive → yield above model → market cheap/undervalued |
Negative → yield below model → market rich/overvalued
Sources: Federal Reserve H.15 (DGS10, DGS2, FEDFUNDS), Bureau of Economic Analysis (PCEPILFE), Bureau of Labor Statistics (UNRATE), Congressional Budget Office via FRED (NROU). All data via FRED.