Term premium

The extra yield for holding a long bond over rolling short ones. A yield is expected short rates plus this.

• Macro and rates
• Markets

3 ideas that carry it

• TechniqueMacro and ratesResearch

  A yield is expected short rates plus a term premium, and the premium is modelled, not seen

  Term premium is an estimate from a model; say which model, and treat the level as less certain than the direction.

  Any rates conversation that invokes the term premium, and any question about why long yields moved while policy did not.

  From Treasury Term Premia: 1961-Present · Tobias Adrian, Richard K. Crump, Benjamin Mills and Emanuel Moench, Federal Reserve Bank of New York (Liberty Street Economics)

• TechniqueMacro and ratesResearch

  Split a move in the ten-year into expected policy and term premium with one rule of thumb

  A steepening is mostly term premium; a move in the two-year is half expectations, half premium. Use the rule, then say which model you trust.

  A markets interview asks why long yields moved, or a desk needs a quick decomposition before the models update.

  From The Treasury Tantrum of 2023 · Anthony M. Diercks and Dev Asnani, Board of Governors of the Federal Reserve System (FEDS Notes)

• FrameworkMacro and ratesResearch

  The near end of the curve carries the recession signal, not the long end

  An inverted curve is the market expecting cuts; read the near-term forward spread, because the long spread is diluted by the term premium.

  Rates, macro and sales and trading interviews, and any time a headline says the curve has inverted.

  From (Don't Fear) The Yield Curve · Eric Engstrom and Steve Sharpe, Board of Governors of the Federal Reserve System (FEDS Notes)