The Term Premium Is Negative Again
It's official. Or as official as it can be considering we're talking about something that's impossible to measure with anything like precision. The term premium is negative. Again.
I won't pretend anyone cares. The term premium, like r-star, isn't even exciting when it's undergoing a sea change. And anyone you might impress by talking at length about it isn't someone you'd want to marry, with apologies to all the single economists out there searching for a soul mate.
And yet, I'd be remiss not
Admittedly, I’m way out of my depth when it comes to term premiums and r-star, but couldn’t this be construed as evidence that rates in developed economies are still in a long-term downtrend that ends in either zero or near zero interest rates except when we get inflationary shocks like the pandemic? With demographics flattening out and the Fed put, I don’t see why rates or r-star or risk premiums wouldn’t trend down over time and end near zero with some brief exceptions.
Add in what I think will be a significant deflationary impulse from AI and it won’t surprise me in the slightest if we are soon back in the familiar world of the 2010s.
Good comment
Judging by various term premium estimate series on FRED, term premium and yield trended down from 1990 until recently, very roughly but not always moving together. Periods of negative term premium seems associated with periods of ultra-low yields (<1% for five year, <2% for ten year). If yields are going to be stable-ish from here, or at least not headed to ultra-low levels, then naive chart staring suggests term premium should tend to be positive. Low positive, but positive. That said, the charts also show these relationships do get stretched for longer than wrong-footed traders can remain solvent.
See charts
Five year
https://fred.stlouisfed.org/graph/?g=1bGNW
Ten year
https://fred.stlouisfed.org/graph/?g=1bGNZ
Thinking about the reasons for a term premium, the list of possibilities includes uncertainty (of inflation, rates, economic); demand for bonds from foreign and domestic buyers; bond supply – and I guess we need to include borrower creditworthiness. I don’t know how those sum up.
Example list
https://www.federalreserve.gov/pubs/feds/2005/200533/200533pap.pdf