(Bloomberg) — The US Treasury market, already mired in one of its worst losing stretches of the year, is flashing a fresh warning sign of mounting risks as yields surge.
The so-called term premium on 10-year Treasury notes — an expression of the extra yield investors demand for owning the debt rather than rolling over shorter-term securities — has risen from near zero to just under a quarter point so far this month to the highest since last November, a Federal Reserve gauge shows.
As academic as the indicator may sound, the measure is closely monitored by market watchers. It offers important information about investors’ perception of future risk — whether it be inflation, supply or anything else that extends beyond the expected path of short-term rates.
In the latest instance, the jump in term premium comes amid a deepening bond market selloff as traders price in a shallower path of Fed interest-rate cuts in the face of resilient economic data.
Also playing an important role in the past week is a very tight presidential race and a growing feeling among some investors that the Republican party has the chance of gaining Congress and the White House. That outcome is seen as increasing the prospect of more spending and tax cuts — on top of the inflationary pressures of Donald Trump’s proposed tariff regime — at a time when US borrowing is highly elevated.
“It’s a combination of things right now, with the election, fiscal and tariff risks, so term premium is higher,” said George Catrambone, head of fixed income, DWS Americas. “Labor and consumer resiliency keeps inflation and growth higher than the Fed’s long-term targets.”
According to the Fed’s measure, the term premium on the US 10-year note turned positive last October for the first time since June 2021, and peaked at just under half a point as deficit spending concerns flared. The measure plumbed a generational low of -1.67% in 2020 — driven in part by declining inflation and in the years before that was largely contained by Fed purchases of government bonds as a component of its monetary policy.
Now, the measure is rising as selling pressure across the bond market pushes the Bloomberg Treasury index to a 2.1% loss for October. Treasuries are on course for their first monthly decline since April, with the 10-year yield headed toward 4.25%.
The bearish mood was triggered early this month after a strong employment report for September surprised investors. A GDP forecast from the Atlanta Fed shows the economy expanding at a 3.4% pace for the third quarter.
While 10-year Treasury inflation expectations remain stable and below 2.5%, the bond market awaits next week’s latest Treasury forecast for debt sales over the coming quarter and will pay close attention to the department’s signals on the longer-term trajectory. Meanwhile, the proximity of the US election is igniting longer-term concerns over excessive debt and deficits, which are seen as a potentially greater threat under Trump.
“The US fiscal outlook is expected to worsen under a Trump presidency raising the compensation investors require for holding long-dated Treasuries, the term premium,” said Elias Haddad, a strategist at BBH.
By Michael Mackenzie and Greg Ritchie
