Bonds & Interest Rates5 分で読めます

What Is the Term Premium

Locking your money away for 10 years is far more unsettling than locking it for just 1 year. Would you believe there's a 'bonus rate' you receive as compensation for taking on that unease?

Long-term rates are made of two pieces

Suppose a 10-year government bond yields 4%. This 4% can actually be split into two parts.

First, the 'expectation' of roughly what short-term rates will average over the next 10 years. It's the average of the rates you'd expect to receive if you rolled over 1-year bonds every year.

Second, the compensation for taking on 'the risk of locking away 10 years at once' instead of rolling over short like that. This extra reward is exactly the term premium.

In other words, long-term rate = average expected future short-term rates + term premium.

Why a premium attaches to 'term'

The longer you lock money away, the greater the uncertainty. Prices could jump in the meantime, or rates could surge and make your bond's price fall. There's also the risk of urgently needing money and having to sell midway.

Investors don't take on such risks for free. They demand 'give me more since I'll wait longer,' and this extra demand is the term premium.

That's why an 'upward-sloping' curve, where rates are higher the longer the maturity, usually appears. But this is not an absolute law. The term premium can grow, shrink, or even go negative depending on market sentiment and supply and demand.

The term premium is not a directly observed value but one 'estimated' with a model. The ACM model (Adrian, Crump, Moench) of the Federal Reserve Bank of New York provides a representative estimate.

A period when the term premium was negative

Interestingly, in recent history there have been times when the term premium was negative for a long while.

Looking at the New York Fed's 10-year estimate (ACMTP10), it appears to have entered negative territory around mid-2016, stayed there for several years, and then risen back above 0 around 2024. In particular, during the severe COVID shock of March 2020, the estimate is reported to have fallen to a record low (roughly the -1% range).

Negative means demand for safe long-term government bonds was so strong that many people were willing to buy them 'even at a loss, let alone without risk compensation.' It's interpreted as the result of low rates, quantitative easing, and a preference for safe assets overlapping.

The figures above are estimates for a specific model and point in time and differ by institution and method. It's safer to understand them only as 'roughly such a phase existed,' as precise values differ greatly by source. (Source: New York Fed Liberty Street Economics, ACMTP10 data)

Why this concept is useful

Knowing the term premium lets you understand news like a 'yield-curve inversion' more deeply.

The market's message differs depending on whether low long-term rates are due to 'an expectation that future rates will fall' or to 'the term premium having shrunk.'

But it's risky to try to use this as a 'rate-prediction tool.' The term premium itself is an estimate, and no one can be sure how it will change in the future.

For a long-term investor, the usefulness of this concept lies in understanding, not prediction. Knowing why long-term bonds swing more than short-term bonds, and why in some periods that 'bonus' disappears, helps you better grasp the nature of the risk you take on when holding bonds.

よくある質問

Q. Can I know exactly what % the term premium is?

It doesn't come down to one exact value. Since it's not directly observed in the market but estimated with a model, results differ slightly by method, such as the New York Fed's ACM model. So it's realistic to understand it at the level of 'roughly this range, and is it positive or negative now.'

Q. If the term premium rises, is that good for long-term bond investing?

It's hard to say simply good or bad. A rising term premium can mean that long-term bonds you buy going forward offer higher compensation, but at the same time, the long-term bonds you already hold can fall in price due to the rate rise. Rather than trying to call the direction in advance, it's safer to use it as a framework for understanding the volatility risk of long-term bonds.