TL;DR. The yield on a long-term Treasury can be split into two parts: what investors expect short-term interest rates to average over the bond’s life, and a term premium — the extra yield they demand for taking the risk of locking up money for years. After more than a decade hovering near zero (and at times negative), the 10-year term premium has been rising. That’s a big reason long-bond yields keep grinding higher even as the Federal Reserve has cut policy rates.
What term premium really is
Imagine two ways to earn interest over the next ten years. You could buy a 10-year Treasury note and lock in today’s yield. Or you could buy a 3-month Treasury bill, let it mature, buy another one, and keep rolling for a decade. The expectations hypothesis says these two strategies should pay you the same return on average — otherwise an arbitrage would exist.
In reality, rolling short-term bills carries a different kind of risk than holding a long bond. You don’t know what short rates will be in three years; the long bond locks in a yield but its price moves a lot if rates change. Investors are not indifferent between those two paths, and so they demand a little extra compensation to hold the long bond. That compensation is the term premium.
Formally, economists write the long yield as the sum of two components:
Long-bond yield = Expected average short rate + Term premium
The expected short-rate piece reflects how the market thinks about the future path of Fed policy. The term premium piece reflects everything else: inflation surprises, supply and demand for duration, uncertainty about real rates. It is, in effect, a residual — the part of the yield that pure rate expectations cannot explain.
NY Fed — Treasury Term Premia and
Adrian, Crump & Moench (2013), Staff Report 340.
How economists measure it
You cannot observe term premium directly. The market only quotes the total yield. To split it apart, researchers use term-structure models that take the whole Treasury curve as an input and back out a consistent set of expected future short rates and term-premium estimates.
The most widely cited measure is the Adrian-Crump-Moench (ACM) model, published by the Federal Reserve Bank of New York in Staff Report No. 340. ACM fits an affine term-structure model to U.S. Treasury yields using a small set of principal-component factors. The NY Fed publishes the resulting term-premium estimates monthly at its term-premia page, and the 10-year series is mirrored on FRED as THREEFYTP10.
A rival measure is the Kim-Wright model from Federal Reserve Board FEDS 2005-33. It uses a similar affine framework but a different estimation approach, and tends to track ACM closely in direction while sometimes differing in level by tens of basis points. The International Monetary Fund and the Bank for International Settlements publish their own estimates that broadly agree on turning points.
The right way to read these series is as estimates with uncertainty, not precise quotes. The level can move by 15-30 basis points just by changing the model specification. The direction of change and the cyclical pattern are the robust signal.
NY Fed — Treasury Term Premia and the FRED mirror
THREEFYTP10.
What drives term premium
Five forces show up again and again in the term-structure literature:
| Driver | Direction | Why |
|---|---|---|
| Inflation uncertainty | Higher → wider TP | When future CPI is harder to forecast, holders of long bonds demand more compensation per year of duration risk. |
| Treasury supply | Higher → wider TP | Larger deficits and bigger coupon auctions push more long duration onto private balance sheets, requiring more yield to absorb. |
| Foreign / official demand | Higher → tighter TP | Heavy buying by foreign central banks and reserve managers compresses term premium; their pullback widens it. |
| Fed balance sheet (QE / QT) | QE tighter, QT wider | Asset purchases remove duration from the market; quantitative tightening returns it, raising the term premium. |
| Real-rate volatility | Higher → wider TP | Greater uncertainty about the future path of real short rates raises the risk of holding a long bond instead of rolling short. |
The pre-2008 era was characterized by a positive term premium of roughly 100-200 basis points — investors needed a clear premium to hold duration in a world where inflation was still seen as a meaningful tail risk. Then a combination of forces compressed the term premium dramatically. Global central banks bought trillions of dollars of long-dated bonds under quantitative easing. Asian sovereign reserves and pension funds piled into Treasuries. Inflation looked anchored. By the mid-2010s, several mainstream models showed the 10-year term premium at zero or even moderately negative — which is to say that, at the margin, holders of duration were accepting a discount for the privilege of owning a safe long asset rather than rolling short paper.
That world has unwound. The Fed has been letting its balance sheet shrink under quantitative tightening. U.S. Treasury issuance has grown sharply alongside the federal deficit. Foreign official buyers have backed away from the auction window. And inflation, while back near target, has displayed more volatility than the placid 2010s suggested. Each of those is, on its own, a force pushing the term premium higher.
Why this matters for the 2026 Treasury market
To see why term premium is back at the center of the bond debate, look at where the U.S. Treasury curve sits today:
| Maturity | Yield |
|---|---|
| 1-Month | 3.681% |
| 3-Month | 3.716% |
| 6-Month | 3.795% |
| 1-Year | 3.855% |
| 2-Year | 4.162% |
| 3-Year | 4.213% |
| 5-Year | 4.280% |
| 7-Year | 4.405% |
| 10-Year | 4.536% |
| 20-Year | 5.020% |
| 30-Year | 4.999% |
The 30-year yield is now flirting with 5% even though the Federal Reserve has cut its policy rate. That is exactly the configuration the term-premium framework was built to explain: the expected average short rate over the next thirty years cannot plausibly be 5% if the Fed has signalled a long-run neutral rate well below that. The wedge between the long yield and rational expectations of short rates is the term premium — and right now, the wedge is doing real work.
That has consequences far beyond government bonds. Corporate borrowing costs, the discount rate used in equity valuations, and the affordability of a 30-year mortgage all key off the long Treasury yield. When the term premium rises, those costs rise even if the Fed is easing. It is the bond market’s way of saying that the world has become a riskier place to hold duration — and the rest of the financial system has to pay accordingly.
Common mistakes when thinking about term premium
Treating model estimates as precise truth
Different models give different point estimates. A headline that says the 10-year term premium is “57 basis points” is showing one model’s output for one day. Use the level directionally and watch the trend.
Confusing term premium with the yield curve slope
The slope of the curve (say 10s minus 2s) blends expected rate paths and term premium together. An inverted curve can coexist with a positive term premium if the market expects short rates to fall faster than the term premium widens. The two concepts are related but are not the same number.
Forgetting the inflation component
Most published series are for nominal term premium. Part of the move can reflect an inflation risk premium as opposed to a real-rate premium. Comparing 10-year TIPS yields with nominal yields is the cleanest way to see which leg is driving the move.
What to watch next
If you want to follow term premium on your own, three series do most of the work:
- THREEFYTP10 on FRED — the 10-year ACM term premium, updated monthly.
- DGS10 — the daily 10-year Treasury constant-maturity yield, so you can see the total versus the premium.
- DFII10 — the 10-year TIPS real yield, which lets you separate real-rate from inflation drivers.
For the underlying methodology and a deeper read, the original ACM staff report and the NY Fed’s term-premia data page are the canonical sources. Once you internalize the decomposition, a long-bond move that would otherwise look puzzling — the Fed is cutting, but the 30-year keeps rising? — usually has a clean story behind it.
Sources
- Federal Reserve Bank of New York — Treasury Term Premia
- Adrian, T., Crump, R. K., & Moench, E. (2013). Pricing the Term Structure with Linear Regressions. NY Fed Staff Report No. 340
- Kim, D. H., & Wright, J. H. (2005). An Arbitrage-Free Three-Factor Term Structure Model. FEDS Working Paper 2005-33
- FRED — 10-Year Treasury Term Premium (THREEFYTP10)
- FRED — 10-Year Treasury Constant Maturity Rate (DGS10)
- FRED — 30-Year Treasury Constant Maturity Rate (DGS30)
- FRED — 10-Year Treasury Inflation-Indexed Security (DFII10)
- U.S. Treasury — Daily Par Yield Curve
- Investing.com — U.S. Government Bond Yields
- Federal Reserve — Balance Sheet Recent Trends
Disclosure: This article was produced with AI assistance and reviewed before publication. It is for informational purposes only and is not investment advice.