(Bloomberg) — The U.S. Treasury market, already mired in one of its worst losses of the year, is issuing a new warning signal of rising risks as yields rise.
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The so-called term premium on 10-year government bonds – an expression of the extra return investors demand for owning the debt rather than rolling over the shorter-term securities – has risen from almost zero to slightly less so far this month then a quarter point. the highest since last November, according to a Federal Reserve poll.
However academic the indicator may sound, the measure is closely monitored by market watchers. It provides important information about investors’ perception of future risk – whether inflation, supply or something else beyond the expected path of short-term interest rates.
In the latter case, the jump in the term premium comes amid a deepening bond market sell-off as traders assess a shallower path of Fed rate cuts in light of resilient economic data.
Also playing a key role this past week is a very tight presidential race and a growing sense among some investors that the Republican Party has a chance to win over Congress and the White House. This outcome is seen as raising the prospect of more spending and tax cuts – on top of the inflationary pressures from Donald Trump’s proposed tariff regime – at a time when US borrowing is very high.
“It’s a combination of things right now, with the election, budget and rate risks, that are pushing forward premiums higher,” said George Catrambone, head of fixed income at DWS Americas. “The resilience of labor and consumers is keeping inflation and growth higher than the Fed’s long-term targets.”
By the Fed’s measure, the term premium on the U.S. 10-year bond turned positive last October for the first time since June 2021, peaking at just under half a point as concerns about spending shortfalls flared. The measure fell to a generational low of -1.67% in 2020 – driven in part by falling inflation and largely kept in check in previous years by the Fed’s purchases of government bonds as part of its monetary policy.
Now the gauge is rising as bond market selling pressure pushes the Bloomberg Treasury index to a 2.1% loss for October. Government bonds are on track for their first monthly decline since April, with the 10-year yield heading towards 4.25%.
