U.S. long-term Treasury yields have climbed back to their highest levels in more than two decades, but Wall Street is paying closer attention to a different signal: the rapid rise in term premium. According to a New York Fed model, the term premium on the 10-year Treasury has risen by about 40 basis points since mid-September to roughly 0.98%, the highest level since 2014. Over the same period, the 10-year Treasury yield increased by about 30 basis points. A separate model that incorporates economists’ forecasts for Federal Reserve rates shows the 10-year term premium at 1.08%, its highest reading since 2010. Frank Rybinski, head of macro strategy at Aegon Asset Management, said that while different models produce different results, the indicators are pointing in the same direction: term premium is rising. In his view, that suggests the current move higher in long-end yields may prove more persistent than a rally driven only by expectations for Federal Reserve policy.
U.S. long-term Treasury yields have recently returned to their highest levels in more than two decades, but Wall Street is not focused only on whether the Federal Reserve will keep raising rates.
The bigger warning sign is the sharp rise in term premium, a measure that has historically drawn far less attention from ordinary investors. A New York Fed model shows the term premium on the 10-year U.S. Treasury has climbed by about 40 basis points since mid-September to around 0.98%, the highest level since 2014. During the same period, the 10-year Treasury yield rose by about 30 basis points.
Another model, which factors in economists’ forecasts for Federal Reserve rates, shows the 10-year term premium has reached 1.08%, its highest level since 2010.
Frank Rybinski, head of macro strategy at Aegon Asset Management, said that although different models produce different readings, all of the indicators are now pointing in the same direction: term premium is rising. That, he said, suggests the current increase in long-end yields may be more durable than a move driven solely by expectations for Federal Reserve policy.
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