IV Macro Policy & Sovereign Debt
Term premium
The extra yield an investor demands for holding a long-dated bond.
How it works
A long bond's yield has two parts. The first is the average short-term rate the market expects over that horizon. The second is the term premium: the compensation an investor wants for tying money up for years.
The premium cannot be observed directly; it is estimated with a model, most commonly the New York Fed's ACM model. When it rises, long-term yields rise even if the central bank never moves its policy rate.
The usual causes are supply and uncertainty: heavier long-dated issuance, a murky inflation path, or a shrinking buyer base all make investors ask for more.
Why it matters here
The term premium is where borrowing costs leave the central bank's hands. When defence spending, an energy shock or political uncertainty gets priced into the long end, governments and firms pay more even with policy on hold. It is the earliest place to read a geopolitical event passing into interest rates.