Why term premiums on U.S. Treasurys have been rising

When investors buy long-term government bonds, they like to be paid some extra yield to convince them to lock away their money for seven, 10, or even 30 years. The extra premium that investors require to hold Treasurys over the long-term is known as a “term premium.” Over the last week or so, term premiums have been rising.

Investors want more compensation to hold long-term Treasurys right now for a couple of reasons, according to Guy LeBas with Janney Montgomery Scott.

“One is concerns about how much debt the so-called hyperscalers are going to have to issue in order to fund their capital spending, their expansion into AI data centers,” he said.

All that new debt from the likes of Amazon, Meta, Microsoft, and other big tech companies means that corporate bonds are going to have to pay higher yields to attract investors. That can make government bonds want to join the party.

“There’s a certain amount of interchangeability between a high-quality corporate bond and a government bond,” LeBas said. “And so if there’s a lot of issuance, interest rates on both of those are going to have to go up.”

Bond investors are also growing more concerned about inflation, said JPMorgan Chase’s Alex Wolf.

“If you have a 10-year bond or a 30-year bond, you’re worried that inflation is going to run high, and that will erode the long-term value of your investment,” he said.

Wolf said one reason investors are concerned is because the Federal Reserve has been sending mixed signals about how it’s going to fight inflation.

Anna Cieslak, an associate professor of finance at Duke University, has studied how the market reacts to Fed communication.

“When the market is uncertain about how the Fed responds to the economy, that imposes additional costs, in the form of the term premium,” she said.

And that, in turn, raises borrowing costs throughout the economy.