The term premiums of US government bonds – the parts of their yields that do not capture expectations for short-term interest rates – are unusually low. Indeed, according to the estimates of some Fed staffers, the term premium of 10-year Treasuries is currently around minus 60bp. While we think term premiums are likely to remain depressed by the standards of the past, we would not be surprised if they edged up a little over the next couple of years. This would add to the upward pressure on yields that we think will result from the Fed tightening policy more rapidly than investors are currently assuming.
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