ON THE DESK RIGHT NOW
2s10s +39bp
as of close · live on the rates board
Term Premium
The term premium is the extra yield investors demand for holding a long-term bond instead of rolling short-term bills over the same horizon. Decompose a 10-year yield and you get two parts: the average expected short rate over the next decade, plus the term premium: compensation for inflation uncertainty, supply risk, and the chance the rate path is wrong.
It matters because it explains long-end moves that Fed expectations cannot. When 10-year yields surge while cut pricing is unchanged, classically after heavy refunding announcements or sticky-inflation scares, that is term premium repricing. It is also unobservable, so the market leans on model estimates like the New York Fed’s ACM series, which spent much of the 2010s negative before rebuilding toward positive territory in the mid-2020s.
- Rising term premium drives bear steepening: long yields up more than short ones.
- Treasury supply, foreign demand shifts, and QE/QT are its main movers.
Worked example: The 10-year yields 4.35%. Fed funds futures imply an average policy rate of 3.60% over ten years. The implied term premium is roughly 75bp. Treasury then announces larger-than-expected coupon sizes; the 10-year rises to 4.50% with no change in the expected Fed path: a 15bp term premium shock, and 2s10s bear-steepens accordingly.
On the Helious desk right now
FAQ
What is term premium?
The extra yield investors demand for holding a long bond rather than rolling short ones, over and above expectations for the policy rate. It is the price of duration risk: uncertainty about inflation, about supply and about the path of rates.
What makes term premium rise?
Heavier long-end issuance, inflation uncertainty, and doubt about fiscal policy. When term premium is building, the long end sells off even when the market is not repricing the Fed, which shows up as a bear steepener on the curve. Helious names which regime is running right now on the rates board.
How do I see term premium in the market?
Watch the long end move without a matching move in the front end, and watch 30-year auction tails and indirect shares, which are where reluctance to hold duration appears first. Helious publishes both on the 30-Year Bond hub.