- In our 3Q commentary, we pointed out that “term premiums,” the extra yield investors demand to compensate for risks implicit in buying a longer-term bond, turned positive after spending much of the past five years below 0%.
- The shift caused some market pundits to worry that the case for a higher-for-longer interest rate environment is now stronger.
- It’s notable that the term premium on the 10-year Treasury has historically been significantly higher for long periods at a time, as shown in this chart. In fact, according to The Wall Street Journal, the term premium has added an average 1.5% to 10–year yields since 1961.
- Possible factors contributing to higher term premiums on long-term bonds include the rising level of federal debt and deficit funding.
- Could rising deficits and ever-increasing levels of U.S. debt finally matter to fixed income investors? Only time will tell. But, if term premiums continue to rise, interest rates could head even higher from here. Read our 3Q Commentary for additional insight.
Chart source:
FactSet Research Systems