I’ve spent a ton of time since “Liberation Day” talking about the term premium, and I’m hardly alone.
Traditionally, this is an esoteric discussion — an academic pastime that only an econometrician could enjoy.
Before “Trump 2.0,” the only thing interesting about the term premium was the persistence of negative estimates. There’s something counterintuitive about negative “compensation” for bearing long-term risk.
The aberrational nature of that phenomenon occasionally garnered some attention outside of “wonk” circles, but other than that, talking about the term premium was a good way to signal how terribly boring your personal life must be.
Nowadays, the term premium’s a pretty spicy topic. In 2025, this discussion has everything you want from a contentious politico-market debate: Deficit doomsaying, de-dollarization allusions and, of course, the specter of democratic backsliding in the US.
Long story short, the market wants more compensation to take on the risks associated with long-term bonds issued by large, advanced democracies. This is a big story because, for one thing, those risks should be negligible. But also because, as noted above, modeled estimates of that compensation were negative for quite a long time due to various post-GFC bond market distortions.
In the US, the term premium widened out near 100bps last week as the curve bear steepened. The last thing you want is a term premium-driven bear steepener. That’s “just death” for risk sentiment, as I put it a few days ago.
So, how wide might the US term premium go? The depends in no small measure on how far Donald Trump goes towards diminishing America’s standing and reputation. And please, for the sake of your own sanity, don’t say he hasn’t diminished America’s standing and reputation. Because he undeniably has.
The figure below gives you some context for the recent widening, both in the US and also in bunds and gilts.
The overarching message is that there’s a ways to go for USTs and bunds to reach their pre-GFC average.
In the US, “the market’s focused on the tax and spending bill, maintaining expectations for a sustained supply of Treasurys,” SocGen’s Adam Kurpiel remarked, adding that on the demand side, private investors are being asked to absorb more debt even considering the QT taper. That, amid “questions” about foreign appetite for US assets.
Kurpiel noted that in the event investors “diversify their bond holds away from US Treasurys,” that demand could cap the term premium in bunds, which would be helpful given Germany’s ramped-up borrowing.
Separately, SocGen’s Stephen Spratt wrote that in addition to “common factors” which explain a wider term premium (i.e., central bank QT, the perception of fiscal profligacy and waning demand for duration), there’s now a role to play in the US context for “unusually high headline risk” and investor concerns around a “lack of predictable policies.” (How to say “Trump” without saying it.)
The term premium in Treasurys is up 65bps since election day, Spratt went on, adding that to reach pre-Lehman “norms,” it’d need to rise another 100bps. Suffice to say such a widening, if it were to play out over a compressed window, could be disruptive.
