Key points
- Can't be observed directly; it is estimated with models.
- Falls during QE (the central bank buys long bonds) and in flights to safety.
- Rises with uncertainty about inflation and heavy government borrowing.
Example
If the 2-year yields 4.5% and the 10-year 4.8%, the 30 bp gap reflects both expected future short-term rates and the term premium; models are needed to separate them.
In history
New York Fed model estimates put the 10-year term premium below zero for much of 2016-2021, during and after QE. It turned positive in 2023 as QT, heavy government borrowing and inflation uncertainty pushed long yields up.
Related terms