Extra yield investors demand for holding longer maturities instead of repeatedly rolling short-term instruments.
Term premium is the extra yield investors may require for holding a longer-maturity bond instead of repeatedly rolling shorter-term instruments. It compensates for risks such as interest-rate uncertainty, inflation uncertainty, duration exposure, and changing demand for long bonds.
Term premium helps explain why long yields can move independently of near-term policy expectations. It matters for duration positioning, valuation scenarios, pension and insurance portfolios, mortgage rates, and macro interpretation of the long end of the curve.
A simplified way to think about a long yield is:
For example, if the expected average short-rate path over ten years is 3.80% and the 10-year Treasury yield is 4.30%, one rough interpretation is that 0.50%, or 50 basis points, reflects term premium and related long-horizon compensation.
| Driver | Possible effect |
|---|---|
| Inflation uncertainty | Investors may require more compensation for long maturities. |
| Rate volatility | Higher uncertainty can increase required long-end compensation. |
| Treasury supply | More duration supply can pressure long yields higher. |
| Safe-asset demand | Strong demand for long bonds can compress term premium. |
| Balance-sheet constraints | Dealer and investor balance-sheet limits can affect long-end pricing. |
Observed yield data can be checked against U.S. Treasury interest rate statistics and Federal Reserve H.15 selected interest rates. For model-based estimates, use sources such as New York Fed term premia data and state that the estimate is model-dependent.
This page is for financial education only. It does not forecast rates, bond returns, or the suitability of any duration strategy.