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.
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.
Frequently asked
Why is term premium hard to measure?⌄
What raises term premium?⌄
Is term premium the same as the inflation risk premium?⌄
How do you trade term premium?⌄
Track it on Market Ontology
Related terms
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