It’s time for a term premium check.

Why? Well, mostly because it’s a random, somnolent Tuesday in mid-May. These are the sort of days when you have to manufacture “news.” It’s environments like these which separate the men from the boys. The “content creators” of the world from pathologically obsessive personalities who’d sooner let a picture-perfect day at Mitchelville Beach Park go to waste than fail to meet a self-imposed article quota.

It’s ok. Save your (crocodile) tears for someone else. I’ll get out there later. That’s where I go every summer to re-read The Sun Also Rises. And yes, I know what happened to Ernest in the end. I’ve been assured by two board-certified psychiatrists that whatever’s wrong with me isn’t that.

Anyway, the term premium. Here it is:

So, ~71bps, give or take, according to the latest estimate on the ACM model which, I should note, was last updated on May 16 before the Moody’s downgrade later that evening.

Do note that with the exception of the infamous post-Fitch downgrade bear steepener (i.e., the August-October 2023 episode), the term premium was mostly negative during the Biden years. It’s been squarely positive since September, when betting markets began to price higher odds of a Trump win and a “red sweep.”

The assumption initially was that Trump with a beholden Congress would likely worsen America’s already perilous fiscal trajectory by ramming through unfunded tax cuts. That turned out to be true (or I suppose I should say it’s in the process of becoming true), but Trump’s policies since Inauguration Day have given investors other reasons to demand more in the way of compensation to lock their money up in US bonds for a decade.

The figure above gives you a longer view. You can make the case that 2023’s widening was the start of something, but I really do think it’s more accurate to date the “We’re not in Kansas anymore” moment to Trump’s reelection.

It’s not just about fiscal profligacy anymore. It’s about the rule of law. And NATO Article 5. And the fate of the exorbitant privilege. The post-War order hangs in the balance. “Human sacrifice, dogs and cats living together. Mass hysteria!” Things are so crazy Ernie Hudson can’t stay in character. (Someone will get it.)

No, but seriously, remember that the term premium “shouldn’t” be negative in the first place. A negative term premium is a paradox. An aberration, albeit one that’s explainable. Going forward, the forces that suppressed the term premium are either fading away or are insufficient to override the factors arguing in the opposite direction.

“The longer-term story is the continued rise in term premia,” SocGen’s Subadra Rajappa remarked, suggesting we’ve entered a “higher for longer” environment for US yields. That’ll “add to the government’s net interest cost and deficits,” she went on, before warning that “over the long run, the erosion of the safe-haven status of Treasurys has implications for the dollar” as well as foreign demand for US assets in general.