Term Premium Explained: Why Long Bond Yields Rise for Reasons Beyond the Fed

Macro Guide, 2026

By Ken Chigbo, Founder, KenMacro, UK macro desk.

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Updated 2026-06-03

What the term premium actually is

Lend money for ten years and you take on risk a saver in three-month bills avoids. Over a decade, interest rates can jump, inflation can erode your fixed coupons, and the economic outlook can turn in ways nobody priced at the start. The term premium is the compensation you demand for carrying that uncertainty, the extra yield on a long bond above what you would earn simply rolling short paper again and again. Think of it as the price of duration risk. If you were certain about the path of short rates for the next ten years, you would need no premium at all, because the long bond and the rolled short bills would be equivalent. Certainty is fiction, so investors charge for it. The size of that charge is not fixed. It expands when the future looks murky, when bond supply is heavy, or when buyers turn scarce, and it shrinks when safe duration is in fierce demand. That is the heart of what is term premium really measures.

The decomposition, and why it can go negative

A long yield breaks into two pieces. The first is the average short-term rate the market expects over the bond’s life, driven entirely by where the Fed is heading. The second is the term premium, the risk compensation stacked on top. Add them and you get the headline 10-year yield. Here is the catch: the premium is not directly observable. You cannot read it off a screen the way you read a price. It has to be estimated by models, and the best-known is the Adrian, Crump and Moench (ACM) model published by the New York Fed. Different models give different numbers, so treat any ACM term premium figure as an estimate, not a measurement. It can even turn negative. Through the 2010s, heavy central bank bond buying under QE plus strong global demand for safe US duration pushed the estimated premium below zero. Investors accepted less yield than the expected path of short rates implied, because they valued the safety and were front-running central bank purchases.

Why a rising term premium matters

When the term premium rises, as it did notably through 2023, long yields climb for reasons other than the Fed’s rate path. The expected short rate can sit still while the long bond sells off anyway. Usual culprits include heavy government bond supply from large deficits, reduced central bank buying as QT runs, and fiscal or inflation uncertainty that makes locking up money for a decade feel riskier. This is the answer many traders miss when they ask why bond yields rise even after the Fed signals a pause. A rising premium tightens financial conditions independently of the Fed, doing some of the central bank’s work for it. It pressures long-duration bonds directly and weighs on high-valuation equities whose worth depends on cash flows far in the future. It is a core part of the higher-for-longer backdrop. The move is dollar and rates relevant too, since climbing real long yields tend to firm the dollar and challenge gold, at least until the safe-haven bid takes over.

How the desk reads the term premium

Rule one: always ask whether a yield move is an expectations story or a premium story. If the Fed path is unchanged but the long end is selling off, the premium is doing the work, and that is a supply or uncertainty signal, not a hawkish Fed. Rule two: watch the long end on auction-heavy weeks and around fiscal headlines. Big deficits and fading central bank demand push the premium up, and the 10-year and 30-year feel it first. Rule three: respect the cross-asset read. A premium-led rise in real long yields tightens conditions, pressures long-duration equities, and tends to support the dollar, so do not treat it as just a bond event. Keep the ACM estimate in view as a guide, not gospel, since it is modelled rather than measured. Combine it with supply calendars, deficit news and inflation risk to judge whether higher-for-longer has further to run. Related guides on real yields, QT and the dollar are linked below.

The desk’s checklist

1. Pull the long yield. Start with the 10-year Treasury yield as your headline number. It is the figure everything else gets measured against, and it is where the expectations and premium components combine into one quoted rate.
2. Strip out the expected path. Estimate the average short rate the market expects over ten years from Fed pricing and futures. That gives you the expectations component, the part that moves purely on where rates are heading.
3. Read off the premium. Subtract the expected short-rate path from the long yield and what remains is the term premium. In practice, lean on the ACM estimate from the New York Fed rather than computing it by hand.
4. Check the drivers. Ask what is moving the premium: bond supply from deficits, lighter central bank buying, or fiscal and inflation uncertainty. These push it up, while strong safe-haven demand for duration pulls it down.
5. Trade the read. Map the premium move across assets. A rising premium tightens conditions, pressures long-duration bonds and growth equities, and tends to firm the dollar, so position the rates and FX book accordingly.

Frequently asked

What is the term premium in simple terms?

It is the extra yield you demand for holding a long bond instead of rolling short-term bills. You take on duration risk over many years, the chance that rates, inflation or the outlook change against you, and the term premium is your compensation for carrying that uncertainty. A long yield equals the expected average short rate plus this premium.

How is the term premium measured?

It cannot be measured exactly because it is not directly observable. Instead it is estimated using models, the best-known being the Adrian, Crump and Moench (ACM) model published by the New York Fed. Different models produce different estimates, so any ACM term premium figure should be treated as a modelled approximation rather than a precise, observed number you can read off a screen.

Can the term premium be negative?

Yes. Through the 2010s the estimated term premium fell below zero. Heavy central bank bond buying under QE, plus strong global demand for safe US duration, meant investors accepted less yield than the expected path of short rates implied. They valued the safety and were front-running central bank purchases, so they were willing to be paid a negative premium to own the bonds.

Why do bond yields rise when the Fed is on hold?

Because the term premium can rise even when the expected rate path is flat. Heavy government bond supply from large deficits, reduced central bank buying, and fiscal or inflation uncertainty all lift the premium. That pushes long yields up for reasons separate from the Fed, which is why long bonds can sell off while the policy path stays unchanged.

Why does a rising term premium matter for markets?

A rising premium tightens financial conditions without the Fed acting. It lifts long yields, pressures long-duration bonds directly, and weighs on high-valuation equities whose worth sits in distant cash flows. It is central to the higher-for-longer story. Rising real long yields also tend to firm the dollar and challenge gold, so the effect runs across rates, equities and FX together.

Educational analysis only, not financial advice. KenMacro has commercial partnerships with some firms referenced and may earn a commission if you open an account, at no cost to you. Manage risk against your own circumstances.