Term Premium
The extra yield long-duration bonds offer over rolling short-duration bonds — compensation for duration, inflation, and supply risk.
Definition
Term premium is the residual yield on a long bond once the expected path of short rates is stripped out. It's not directly observable; the most common estimates come from the NY Fed (ACM) and Kim-Wright models.
A rising term premium means investors demand more compensation per unit of duration, usually due to inflation uncertainty, supply concerns, or weaker reserve-manager demand.
Public research record
Research framework · page evidenceCompleted application: Term Premium
Term premium drives the long end independently of Fed expectations. Bear-steepening episodes are usually term-premium events, not policy-pricing events.
| Type | Claim | Scope |
|---|---|---|
| Release fact | The extra yield long-duration bonds offer over rolling short-duration bonds — compensation for duration, inflation, and supply risk. | Rates |
| Release fact | Q3 2023: 10Y yields rose ~100bp without a change in Fed expectations. Decomposition showed term premium accounting for nearly all of the move, driven by Treasury supply and weaker foreign demand. | Published example |
Countercase, invalidators, and sources
The relationship is conditional: another driver can dominate the same asset over the selected horizon.
- · The underlying observation changes materially.
- · The selected asset has no measurable exposure to this mechanism.
Why it matters
Term premium drives the long end independently of Fed expectations. Bear-steepening episodes are usually term-premium events, not policy-pricing events.
Worked example
Q3 2023: 10Y yields rose ~100bp without a change in Fed expectations. Decomposition showed term premium accounting for nearly all of the move, driven by Treasury supply and weaker foreign demand.