U.S. interest rates: Valuations are attractive The evolution of fair value will depend heavily After rising by as much as 260 basis points in on the direction of inflation, the Fed’s response, 2022, the 10-year U.S. Treasury yield has traded and the market’s expectations for future policy in a range of 3.7%–4.3% as the market tries to rates. Figure II-6 shows the expected impact of ascertain the direction of Fed policy. But we our economics team’s inflation and federal funds believe that the terminal rate and the amount rate forecast on the 10-year Treasury yield over of time policy is held at that level will be what the next three years. ultimately matters for U.S. Treasury returns. Based on current economic conditions and Fed policy guidance, our Treasury fair-value model suggests that the yield curve is within our 9 fair-value range. FIGURE II-6 Higher long-term yields are possible, but any trip above historical averages is likely to be brief %  erage -year yied –  Projected range of 10-year Treasury yied  10-year Treasury yied 10-year Treasury yied rojected ­ase case€          Notes: The chart shows the actual 10-year Treasury yield quoted on a constant maturity basis since 1995 and Vanguard’s forecast based on a range of economic scenarios. The forecasts are derived from a statistical model specification that is a five-variable vector error correction model, including the 10-year Treasury yield, first three principal components of covariance matrix for 10-year trailing inflation, 10-year trailing food inflation, the 10-year trailing hourly earnings growth, effective federal funds rate, and 5-year trailing real GDP estimated over the period January 1979–September 30, 2022. Sources: Vanguard calculations, based on data from FactSet, the U.S. Bureau of Labor Statistics, the Federal Reserve Board, Refinitiv, and Global Financial Data. 9 For more details on our Treasury attribution model, see Davis et al., 2021. 42