Nasdaq and Nvidia Hit Records as Tech Outruns a 5.31% 10-Year Yield

Term Premium

A 10-year Treasury yield can be split into two parts: the expected average of short-term interest rates over the next decade, and the term premium, the extra yield investors demand for locking money up for ten years instead of rolling short-term bills. The term premium compensates for the risk that inflation, rates, or bond supply turn out worse than expected, and it cannot be observed directly. Models such as the New York Fed's ACM estimate it. The term premium tends to rise when inflation is uncertain, when governments issue a lot of debt, or when investors want more compensation for volatility in bond prices. It tends to fall when investors want the safety of long bonds, which is why it was depressed for years after the financial crisis. This split explains why long yields can move without any change in the Fed's expected path. If yields rise while rate-hike expectations fall, the term premium is doing the work. Investors then face higher discount rates for equities and higher borrowing costs for mortgages and corporate debt, even if the policy rate does not change.