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.