Term premium
MacroDefinition
The extra yield long-term bonds pay to compensate investors for holding duration risk over short-term bonds. Calculated as long yield minus expected average future short rate.
Term premium has trended structurally lower since the 1980s — possibly because of central bank intervention, foreign reserve buying, and reduced inflation uncertainty. Periods of negative term premium (2017-2020) signal that long bonds yield LESS than the expected average short rate path — usually mean-reverting.
Term premium has trended structurally lower since the 1980s — possibly because of central bank intervention, foreign reserve buying, and reduced inflation uncertainty. Periods of negative term premium (2017-2020) signal that long bonds yield LESS than the expected average short rate path — usually mean-reverting.