(Bloomberg) — It’s one of the least understood signals in the fixed-income world, but lately everyone on Wall Street is abuzz about what it means as it reasserts itself in the market.
Most read on Bloomberg
This is called the term premium, or the additional payment that investors demand in exchange for the risks of owning 10-year Treasury bonds instead of simply rolling over short-term securities for the same duration. The exact way to measure it varies. The same goes for the explanations of his movements.
What is beyond doubt is that in recent weeks it has surged to levels not seen in more than a decade and driven the latest wave of bond selling that has sent U.S. Treasury yields to a 24-year high. And that, in turn, is stoking fears of a potential shift that would increase pressure on an already battered market and keep borrowing costs high across the economy.
This term premium is essentially a hedge against unpredictable twists and turns, ranging from geopolitical shocks to government budget crises, that could hit the market before long-term bonds mature.
This is distinct from the current inflation outlook and monetary policy stance, both of which are also reflected in yields. Because the bounty is not directly observable and must be inferred, Neel Kashkari, president of the Federal Reserve Bank of Minneapolis, once compared it to dark matter, the invisible substance that physicists believe explains some cosmic mysteries.
“There are several ways to calculate it, but they all point upwards,” said Frank Rybinski, head of macro strategy at Aegon Asset Management. “And what that tells me is that this decision has endured.”
What Bloomberg strategists say…
“The sharp revaluation of the term premium embedded in Treasuries – with the 10-year term premium reaching a 12-year high – suggests that investors are demanding greater compensation for holding time amid increasing fiscal and geopolitical uncertainty.”
— Frank Monkam, macro market strategist
Click here to learn more
There was no clear catalyst. Barclays researchers led by Demi Hu said macroeconomic uncertainty, breaks in the usual correlations between stock and bond movements, the growing supply of debt and concerns about fiscal policy are all factors that factor into the term premium and could play a role.
Gn headline
