Term Premium
The excess yield that investors demand to hold a long-duration bond instead of rolling a series of short-term instruments. It compensates for duration risk (price sensitivity to rate changes), inflation uncertainty, and fiscal supply risk. The ACM Term Premium Model (NY Fed) estimates this component separately from the expected short rate path over the bond's life.
Formula / Calculation
Yield = Expected Path of Short Rates + Term Premium
Why It Matters
Rising term premium without a corresponding rise in expected short rates is a red flag — it signals deteriorating demand for long-duration Treasuries and investor concern about fiscal sustainability or inflation. 2023's rapid rise in 10Y yields was predominantly a term premium phenomenon, not a change in Fed rate expectations.
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Related Concepts
Sovereign Rollover Risk
The risk that a government cannot refinance its maturing debt obligations at affordable interest rates. Risk peaks when a large portion of outstanding debt is short-duration (bills), forcing frequent refinancing at prevailing market rates. The US faces a structural rollover challenge: approximately $9.2 trillion of debt matures within 12 months (as of 2024), representing ~33% of the total $34T debt stock.Fiscal Dominance
A regime in which a government's debt burden is so large that monetary policy becomes subservient to fiscal needs — effectively forcing the central bank to keep rates low or monetise debt to prevent insolvency. Named by economist Thomas Sargent in 1981. Unlike normal monetary dominance (where the central bank controls inflation independently), fiscal dominance constrains the central bank's ability to raise rates even when inflation is elevated.Fiscal Dominance Meter
A proprietary composite indicator measuring the degree to which government debt service obligations constrain monetary policy independence. Computed as Federal Interest Expense as a percentage of Tax Revenue, normalised by a 25-year rolling Z-score. Values above +1.5σ indicate the central bank is entering a fiscal dominance regime where raising rates materially worsens fiscal sustainability.Ready to see this live?
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