Term Premium
The term premium is the extra yield investors demand for holding a long-term bond rather than rolling over a series of short-term ones for the same period. It cannot be observed directly and has to be estimated with models.
Also called: term premia · bond term premium · ACM term premium
A long-term yield can be split into two parts: the average of the short-term rates investors expect over the bond's life, and a premium for bearing the risks of locking money up that long. Those risks include unexpected inflation, swings in interest rates and the chance of having to sell before maturity at a loss. The premium is what remains after expectations are stripped out.
Because expectations cannot be observed, the split depends on the model used. The New York Fed publishes estimates from the Adrian, Crump and Moench (ACM) model, Federal Reserve Board staff publish others, and the results can differ substantially. The Federal Reserve's November 2025 Financial Stability Report described its model-based 10-year term premium as close to its historical median.
The term premium explains moves in the yield curve that rate expectations cannot. Central bank bond buying under quantitative easing worked largely by compressing risk and term premiums, according to New York Fed research on the 2008-2010 purchases. A rising premium lifts long-term borrowing costs even when the federal funds rate is unchanged, and a very low one can flatten the curve or produce an inversion that says less about recession than it seems to.
In practice
Every term premium figure is a model output. Quote the model and the date, and do not treat estimates from different models as one series.
Example
If investors expect short-term rates to average 3.5 percent over the next ten years and the 10-year Treasury yields 4.0 percent, the implied term premium is about 0.5 percentage points.
Learn more on Money Wiki
This page gives the short answer. Money Wiki has a longer guide to Term Premium, with more detail and background.
See also
- Yield CurveThe yield curve plots the interest rates on bonds of the same credit quality across different maturities, usually government bonds from one month to thirty years. Its shape shows what markets expect for interest rates, inflation and growth.
- Inverted Yield CurveAn inverted yield curve is one where short-term interest rates are higher than long-term rates on bonds of the same issuer. In the United States it has been one of the more reliable warnings of recession, though not an infallible one.
- Quantitative EasingQuantitative easing is large-scale buying of government bonds and other assets by a central bank, paid for with newly created central bank reserves. It is used to push down longer-term interest rates when short-term rates are already close to zero.
- Federal Funds RateThe federal funds rate is the interest rate at which US depository institutions lend reserve balances to each other overnight. The Federal Open Market Committee sets a target range for it, and that range anchors short-term dollar interest rates worldwide.
- Treasury BillA Treasury bill is a short-term government debt security, usually maturing within a year, that pays no coupon. It is sold below its face value and repaid at face value, and the difference is the investor's return.
Go deeper
- Federal Reserve Board: Financial Stability Report, November 2025, Asset Valuations
- Federal Reserve Bank of New York: Treasury Term Premia
- Gagnon, Raskin, Remache and Sack, Large-Scale Asset Purchases by the Federal Reserve (NY Fed Economic Policy Review)
- Essay: Yield Curve Explained: The Bond Market’s Warning Line