Global Macro Research
Global Macro ResearchWhy bond term premia will continue moving higher
Rising term premia, rather than shifting expectations for central bank policy, have been the main driver of recent bond market sell-offs. We think larger fiscal deficits, elevated policy uncertainty, higher inflation volatility, more frequently positive bond/equity correlations, and fewer lower bound episodes, will continue to put upward pressure on term premia.
Authors
Luke Bartholomew
Deputy Chief Economist
Paul Diggle
Chief Economist
Felix Feather
Economist
Harry Turnbull
Analyst
Duration: 1 Min
Date: 04 de ago. de 2025
Key Takeaways
- The bond term premium is on the rise, from a low of -1.5% on 10-year US Treasuries post financial crisis, to 0.85% now. But various structural trends in the economy could see it move considerably higher still.
- High government debts and deficits mean the supply of government bonds is elevated, which, all else equal, should be absorbed by lower bond prices. This is especially true as large price-insensitive buyers are no longer structural sources of demand, as central banks are now selling bonds and many pension funds are fully funded.
- As the economy becomes more prone to negative supply shocks, inflation is likely to be higher on average and more volatile, the interest rates path less certain, and the bond-equity correlation more frequently positive, which should push up term premia.
- The politicisation of technocratic institutions by the US administration could also push up on term premia. For example, Trump’s firing of the head of the Bureau of Labour Statistics may increase uncertainty about the quality of economics data, while his chance to reshape the Fed after Adriana Kugler’s resignation may lead to greater concerns about fiscal dominance.
Overall, we think that the term premium could return to its long-run average of around 1.5% in the next couple of years. And we wouldn’t be surprised to see spikes in term premia to much higher levels around fiscal and geopolitical risk events.
