Treasury Term Premia: 1961-Present

What it says

This post introduced the New York Fed's daily estimates of the Treasury term premium from the ACM model, named for Adrian, Crump and Moench. A Treasury yield is split into the expected path of short-term yields and a term premium, the extra return investors require for the risk that short rates do not turn out as expected. The estimates come from a five-factor, no-arbitrage affine model fitted to zero-coupon yields, which lets the series run daily back to 1961 and match observed ten-year yields closely. The authors compare it with a survey-based measure and with the Kim-Wright model, which uses some survey data: the three move together over long periods but can differ sharply, and ACM had been notably higher since the financial crisis, implying a lower expected path for short rates. They note the premium is countercyclical and was compressed, at times negative, during asset purchases, much as in the 1960s.

What to take from it

1. 1

   Yield equals expected average short rates plus a term premium; the premium compensates for the risk that short rates evolve differently from expectations.

2. 2

   ACM is a five-factor, no-arbitrage affine model in which yields are linear functions of pricing factors, estimated daily back to 14 June 1961.

3. 3

   A survey-based premium subtracts forecasters' expected average short rate over ten years from the ten-year yield, but long-horizon surveys exist only twice a year since the early 1980s.

4. 4

   Kim-Wright closely matches a simple average of ACM and the survey-based estimate, showing how much survey inputs shape a model's answer.

5. 5

   The series covers maturities from one to ten years and is updated weekly, with fitted yields and expected short rates alongside.

Put it to work on L3VLUP

• Curve Lab
• Yield curve
• Duration