The term premium is positive again. Maybe you heard.

Actually, you probably didn’t hear. This is pretty much the last thing that’ll ever land above the proverbial fold, or anywhere on any front page for that matter. But it’s actually pretty important.

This is another ostensibly esoteric debate, with emphasis on “ostensibly.” Like (too) many other foundational concepts, the term premium is often characterized as arcana, which is unfortunate. It’s just the portion of a bond’s yield that compensates investors for the ambiguity around the path of rates until maturity. You could, after all, just buy short-term bonds and keep rolling them forever. If, instead, you lock your money up for, say, a decade, you want to be compensated for the risk that rates change over 10 years. That compensation is the term premium.

Like the neutral rate, the term premium isn’t something you can directly observe. It has to be modeled by academics, and that’s where everyone loses interest. Hence the term premium’s reputation as an esoteric concept too boring to be anywhere near the front page. Anything that has to be modeled in the Ivory Tower is something regular people want no part of.

But the term premium, like r-star, is topical in 2023 amid various “macro regime shift” debates, and it became even more topical last month, when the Fitch downgrade appeared to serve as a clarion call for investors around the purported “risk” of longer-term US Treasurys given the nation’s allegedly parlous fiscal trajectory.

Part and parcel of the selloff at the long-end was a repricing of the term premium. That repricing had the New York Fed’s 10-year gauge in positive territory for the first time in over two years this week. The rapidity of the recent increase is notable. The New York Fed estimate was around –100bps earlier this summer.

I wouldn’t call this a “landmark moment” exactly, but it’s another signpost along the “higher-for-longer” road, another r-star clue and another reminder that the market is indeed concerned about America’s fiscal outlook.

More colloquially, it’s a reflection of the perceived risks of holding longer dated US government paper and a reclamation, if you will, of compensation in light of that risk.

If you ask Deutsche Bank’s Alan Ruskin, this is an important driver of the dollar now. “Over the past year, we entered a phase where the term premia has been a more important USD determinant, and the term premia has been much more positively correlated with the USD than the risk neutral rate,” he remarked.

The last time that correlation was positive: In the 80s, “when the market was also worried about how the deficit would be financed,” Ruskin added.