Term Premium
The extra yield investors demand to hold longer-term bonds instead of rolling short-term bills — compensation for duration, inflation uncertainty, and supply risk.
The term premium is the additional compensation required by investors for taking on the interest rate risk of holding a long-maturity bond rather than continuously rolling short-term instruments. It reflects uncertainty about future rates, inflation, and the supply/demand balance for duration.
Term premium is not directly observable — it is extracted from yield curve models (such as the NY Fed's ACM model). A positive term premium is normal; a negative term premium (as occurred in 2010s QE era) means investors accept less yield than expected short rates — a sign of intense demand for duration safe assets.
Rising term premium — from a low or negative base — can be more disruptive to markets than Fed hike cycles, because it tightens financial conditions without a compensating signal of economic strength. The 2023 bond sell-off that pushed the 10-year to 5% was driven largely by term premium normalization.
Related Terms
2s10s Spread
The yield difference between the 10-year and 2-year U.S. Treasury notes — the most widely cited gauge of yield curve shape and recession risk.
IntermediateBid-to-Cover Ratio
Total bids received at a Treasury auction divided by the amount sold — a key gauge of demand strength for government debt.
AdvancedCurve Steepening
When the yield spread between long- and short-term Treasuries widens — usually as long yields rise faster than short yields, or short yields fall faster.
AdvancedDuration
A measure of a bond's sensitivity to interest rate changes — the approximate percentage price change for a 1% move in yield.
AdvancedQuantitative Tightening
The Fed's policy of shrinking its balance sheet by allowing bonds to mature without reinvesting the proceeds — the reverse of QE.
AdvancedT-Bond
Long-term U.S. Treasury debt with 20- or 30-year maturities — the most sensitive to interest rate changes among Treasuries.
IntermediateTreasury Auction
The regular process by which the U.S. government sells new Treasury securities to investors via competitive and non-competitive bidding.
IntermediateYield Curve
A graph of Treasury yields across all maturities — from 3 months to 30 years — that maps the term structure of interest rates at a given moment.
Intermediate