Article from the Economist discussing how government bond rates are rising due to a mixture of uncontained inflation, government deficits, and larger political and economic risks. Higher...
Article from the Economist discussing how government bond rates are rising due to a mixture of uncontained inflation, government deficits, and larger political and economic risks. Higher government bond rates are leading to higher mortgage rates. https://archive.is/4c1Ii
A high "term premium" is apparently about the risk that central banks will need to raise interest rates. This seems like the opposite of the previous assumption that low interest rates will go on...
A high "term premium" is apparently about the risk that central banks will need to raise interest rates. This seems like the opposite of the previous assumption that low interest rates will go on forever? It's probably relevant that bond investors have lost money betting that way recently.
But apparently it's not that high:
Well into the 2000s, the term premium was measured in full percentage points, not the tenths of today.
So I guess the take-away is nobody knows what's going to happen - always true, but now it's more broadly understood.
The takeaway I got was that there are more upside risk for bond rates to go up, but it's not as bad of an environment right now as the 70s. So, there are challenges and it could get a lot worse,...
The takeaway I got was that there are more upside risk for bond rates to go up, but it's not as bad of an environment right now as the 70s. So, there are challenges and it could get a lot worse, but there isn't a strong case to believe worst case scenario yet.
I found this article from the Federal Reserve in 2012 helpful in explaining what goes into calculus of the term premium/risk premium of a bond. It also talks about lessons from QE during the...
I found this article from the Federal Reserve in 2012 helpful in explaining what goes into calculus of the term premium/risk premium of a bond. It also talks about lessons from QE during the financial crisis and knock-on effects for investors, which is an interesting retrospective. Anyway, about term/risk premiums it says:
... the expected return from buying a U.S. Treasury or other bond must equal the expected average overnight interest rate over the lifetime of the bond ... [and] ... the investor also demands premiums for holding the risk that the value of the bond will decrease due to unexpectedly high interest rates (the term premium) and for holding the risk that the bond issuer will default (default risk premium). Finally, since investors are ultimately not concerned with the dollars that their investment will yield but only with the quantity of goods that those dollars will buy, the expected real return on the bond subtracts expected inflation.
There's a recent Reuters article that talks about the recent change in term premium in some detail within a US context.
The New York Federal Reserve's estimate of the 10-year 'term premium' - seen as the compensation investors seek for holding long-term Treasuries to maturity instead of rolling over short-term debt holdings - topped 50 basis points this week for the first time since 2014.
Partly reflecting uncertainty about long-term inflation expectations and debt supply and an incoming U.S. administration intent on tax cuts, immigration curbs and tariff rises, the 30-year Treasury yield hit its highest since 2023 on Tuesday and 10-year yields hit their highest in almost 9 months.
At almost 64bps, the 2-to-30 year yield curve gap on Wednesday reached its widest since the Fed started raising interest rates in March 2022. With this week's latest heavy Treasury debt sales frontloaded due to Thursday's market holiday and high seasonal corporate bond issuance in the background, $22 billion of 30-year 'long bonds' go under the hammer later today.
For laypeople: The yield curve gap is important because it demonstrates whether investors (i.e. commercial banks) are buying federal bonds with a look at the short-term being stable or volatile. If they're investing in 2-year returns then they're betting they'll be able to buy more 2-year bonds in 2 years at a better price. If they're investing in 10-year bonds they're hedging against volatility over the next 2-5 years by guaranteed interest over a 10-year period instead.
When central banks buy long-maturity bonds, as mentioned in the Economist article, it means they're pushing off payment of that debt further and further. That's a stop-gap measure and not an investment strategy (because the government is essentially lending to itself and promising to pay itself back much, much later).
Article from the Economist discussing how government bond rates are rising due to a mixture of uncontained inflation, government deficits, and larger political and economic risks. Higher government bond rates are leading to higher mortgage rates. https://archive.is/4c1Ii
A high "term premium" is apparently about the risk that central banks will need to raise interest rates. This seems like the opposite of the previous assumption that low interest rates will go on forever? It's probably relevant that bond investors have lost money betting that way recently.
But apparently it's not that high:
So I guess the take-away is nobody knows what's going to happen - always true, but now it's more broadly understood.
The takeaway I got was that there are more upside risk for bond rates to go up, but it's not as bad of an environment right now as the 70s. So, there are challenges and it could get a lot worse, but there isn't a strong case to believe worst case scenario yet.
I found this article from the Federal Reserve in 2012 helpful in explaining what goes into calculus of the term premium/risk premium of a bond. It also talks about lessons from QE during the financial crisis and knock-on effects for investors, which is an interesting retrospective. Anyway, about term/risk premiums it says:
There's a recent Reuters article that talks about the recent change in term premium in some detail within a US context.
For laypeople: The yield curve gap is important because it demonstrates whether investors (i.e. commercial banks) are buying federal bonds with a look at the short-term being stable or volatile. If they're investing in 2-year returns then they're betting they'll be able to buy more 2-year bonds in 2 years at a better price. If they're investing in 10-year bonds they're hedging against volatility over the next 2-5 years by guaranteed interest over a 10-year period instead.
When central banks buy long-maturity bonds, as mentioned in the Economist article, it means they're pushing off payment of that debt further and further. That's a stop-gap measure and not an investment strategy (because the government is essentially lending to itself and promising to pay itself back much, much later).