Glossary / Markets

Term premium

Term premium is the extra yield investors demand for holding a long dated bond rather than rolling short dated ones, compensating for the uncertainty of committing money for decades.

It responds to the supply of government debt, to uncertainty about future inflation, and to how confident lenders feel about the fiscal path. None of those is directly controlled by a central bank.

When the long end of the curve rises while the short end does not, term premium is usually what moved.

Where people get it wrong

Attributing every long rate move to expected policy. Some of it is the price of uncertainty, and that part does not fall because a central bank cuts.

Related terms

Yield curve The yield curve plots the yields of government bonds against their maturities, showing what the market charges to lend for two years against ten or thirty, and its shape is read as a statement about growth, inflation and risk. Real yield Real yield is the return on a bond after inflation, observable directly in the market as the yield on an inflation protected government bond, and it is the hurdle every other asset has to beat to be worth owning. Breakeven inflation Breakeven inflation is the difference between a nominal government bond yield and the real yield on an inflation protected bond of the same maturity, and it is read as the inflation rate the market expects over that period.

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