top of page

Term Premium at its highest in 11 years!

Zdjęcie autora: Jarosław JamkaJarosław Jamka

Why are bond yields still rising? 10Y UST has just broken through 4.80% and is threatening the stock market, but in practice, other assets as well. Recently, one of the common answers is the growing "term premium". Figure 1 shows the term premium for the 10-year US bond yield (according to the ACM model).



But what exactly is a "term premium"? A few definitions:

- New York FED: "the compensation that investors require for bearing the risk that interest rates may change over the life of the bond";

- San Francisco FED: "the excess yield that investors require to commit to holding a long-term bond instead of a series of shorter-term bonds";

- BIS: "the compensation, or risk premium, that risk-averse investors demand for holding long-term bonds".


In other words, instead of buying a 1-year bond and then rolling over that purchase for 10 years... you can buy a 10-year bond straight away (for an extra premium or discount).


But there are other definitions of "term premium" e.g. (H/T to zerohedge):

- "mystical "plug" concept that supposedly explains bonds moves when nothing else does"; or

- "a concept beloved by financial wonks and STIR traders as it allows them an easy loophole to "explain away" stuff they have no clue about: just blame the "term premium".


Or one interesting interpretation is that it is a yield above that explainable by expected economic activity and future inflation... thus reflecting bond market sentiment.


All-in-all the most important thing is the narrative/sentiment behind the sudden increase in the term premium. As of today it seems that it is mainly the uncertainty of the bond market regarding the actual policy of the new administration.. but this uncertainty has a chance for the first explanations in a few days.. we’ll see if more clarity also means lower term premium..


Figure 2 shows the ACM 10Y term premium since 2010.




13 wyświetleń0 komentarzy

Ostatnie posty

Zobacz wszystkie

Comments


bottom of page