(Bloomberg) — The U.S. Treasury market is already in its worst decline this year, but new warning signs of increased risk are flashing as yields soar.
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The so-called term premium on 10-year Treasuries — a measure of the additional yield investors seek for holding bonds rather than rolling them over short-term securities — has ranged from near zero to a quarter of a point so far this month. It is rising slightly. According to data from the US Federal Reserve, this is the highest level since November of last year.
Although this indicator may sound academic, this indicator is closely monitored by market watchers. This provides important information about investors’ perceptions of future risks beyond the expected paths of inflation, supply, and other short-term interest rates.
In recent years, the jump in term premiums has come amid a deepening bond market selloff as traders price in a shallow path for Fed rate cuts in the face of solid economic data.
Also playing a role is last week’s very close presidential election and the growing belief among some investors that Republicans have a good chance of winning Congress and the White House. The result is seen as raising the possibility of further spending and tax cuts on top of inflationary pressures from President Donald Trump’s proposed tariffs, at a time when U.S. borrowing has increased significantly.
“At this point, the confluence of election, fiscal and tariff risks means term premiums are high,” said George Catrambone, head of fixed income at DWS Americas. “Inflation and growth are above the Fed’s long-term goals due to the resilience of the workforce and consumers.”
The term premium for 10-year U.S. Treasuries turned positive last October for the first time since June 2021, peaking at just under half a percentage point, according to Fed metrics, amid growing concerns about deficit spending. The measure hit a generational low of -1.67% in 2020, due in part to lower inflation and, in previous years, largely due to the Fed buying Treasury bonds as part of its monetary policy. was suppressed.
The index is currently rising as the Bloomberg Treasury Index fell 2.1% in October due to selling pressure across the bond market. U.S. Treasuries are heading for their first monthly decline since April, with the 10-year yield heading towards 4.25%.
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The bearish mood was sparked earlier this month after strong September jobs data surprised investors. The economy will expand at a pace of 3.4% in the third quarter, according to the Atlanta Fed’s GDP forecast.
Inflation expectations for 10-year Treasuries remain stable and below 2.5%, but the bond market awaits the Treasury’s latest forecast for next quarter’s bond sales to be released next week and the department’s signal on the long-term trajectory. will pay close attention to. Meanwhile, the proximity of the US election has raised long-term concerns about over-indebtedness and budget deficits, seen as a potentially greater threat under the Trump administration.
“The U.S. fiscal outlook is expected to deteriorate under President Trump’s administration as term premiums, the compensation investors demand for holding long-term government bonds, rise,” said Elias Haddad, a strategist at BBH.
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