US bond term premium turns positive again amid election uncertainty
By Davide Barbuscia
NEW YORK, Oct 9 (Reuters) -The U.S. Treasury 10-year term premium, a measure of the compensation investors demand to hold long-term government debt securities, moved back into positive territory this week as U.S. economic resilience defied expectations of aggressive interest rate cuts and election uncertainty weighed on long-term bonds.
Term premiums have largely been suppressed for about a decade amid low interest rates that followed the 2007-2009 global financial crisis and the COVID-19 pandemic, but they have crept back up over the past couple of years amid long-term fiscal concerns and expectations inflation will remain sticky.
On Monday the 10-year term premium, as measured by a gauge of the Federal Reserve bank of New York, turned positive for the first time since July 25, New York Fed data showed on Wednesday. It stood at 0.034% on Monday from minus 0.047% on Friday.
The move comes after a spike in Treasury yields following strong U.S. jobs data last week, which prompted investors to pare back bets on the magnitude of future interest rate cuts by the Federal Reserve. Benchmark 10-year yields, which hit an over one-year low in September on expectations of easing monetary policy, have since surged to over 4% and on Wednesday stood at their highest since late July.
Matthew Miskin, co-chief investment strategist at John Hancock Investment Management, said rising term premiums could also indicate markets are betting on higher government deficits under a Donald Trump presidency, should he win the Nov. 5 presidential election against Vice President Kamala Harris.
A new Reuters/Ipsos poll this week showed Harris led Trump by a marginal three percentage points - 46% to 43% - a narrower lead than indicated in a Sept 20-23 Reuters/Ipsos poll.
"What we're seeing is that as odds rise for former President Trump, the longer end of the (Treasury yield) curve also rises," said Miskin. "It very well could be that the Treasury market is sniffing out greater deficit spending, which would then create greater supply and has higher yields for long-dated maturities."
U.S. bond giant PIMCO said earlier this year it expected term premiums to shoot up again amid sticky inflation and rising fiscal deficits. The bond asset manager said in a report on Wednesday widening U.S. deficits and inflationary trade policies after the Nov. 5 election could weigh on long-term Treasuries, despite the near-term prospect of lower rates.
Expectations for inflation over the next decade, measured by the difference between 10-year nominal Treasury yields and yields on 10-year inflation-protected Treasuries US10YTIP=RR, hit 2.284% this week, the highest since July 22.
Reporting by Davide Barbuscia; Editing by Daniel Wallis
Related Assets
Latest News
Disclaimer: The XM Group entities provide execution-only service and access to our Online Trading Facility, permitting a person to view and/or use the content available on or via the website, is not intended to change or expand on this, nor does it change or expand on this. Such access and use are always subject to: (i) Terms and Conditions; (ii) Risk Warnings; and (iii) Full Disclaimer. Such content is therefore provided as no more than general information. Particularly, please be aware that the contents of our Online Trading Facility are neither a solicitation, nor an offer to enter any transactions on the financial markets. Trading on any financial market involves a significant level of risk to your capital.
All material published on our Online Trading Facility is intended for educational/informational purposes only, and does not contain – nor should it be considered as containing – financial, investment tax or trading advice and recommendations; or a record of our trading prices; or an offer of, or solicitation for, a transaction in any financial instruments; or unsolicited financial promotions to you.
Any third-party content, as well as content prepared by XM, such as: opinions, news, research, analyses, prices and other information or links to third-party sites contained on this website are provided on an “as-is” basis, as general market commentary, and do not constitute investment advice. To the extent that any content is construed as investment research, you must note and accept that the content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, it would be considered as marketing communication under the relevant laws and regulations. Please ensure that you have read and understood our Notification on Non-Independent Investment. Research and Risk Warning concerning the foregoing information, which can be accessed here.
