July 8 (Bloomberg) -- A valuation model measuring the extra yield investors demand for holding 10-year Treasuries climbed to the highest level in two years after the June employment report suggested the need for Federal Reserve stimulus is easing.
The CHART OF THE DAY shows the term premium rose on July 5 to 0.46 percent, the highest since July 2011, according to a Columbia Management Investment Advisers LLC model. The gauge rose after a Labor Department Report that day showed the U.S. added 195,000 jobs in June, compared with the median forecast of 165,000 in a Bloomberg News survey. The five-year average on the term premium is 0.21 percent. It reached an all-time low of minus 0.64 percent in July 2012.
It climbed above zero on June 19 for the first time since July 2011 after Federal Reserve Chairman Ben S. Bernanke said policy makers may “moderate” their bond-buying program this year and may end it in mid-2014 if U.S. economic growth meets the central bank’s forecasts.
“The market is taking out the distortion and pricing it closer to fundamentals because you can see the end game materializing,” Guy Haselmann, director of U.S. rate sales and strategy at Bank of Nova Scotia in New York, said in a telephone interview on July 5. “The jobs report solidifies the market’s perception that tapering is going to occur sooner than later. When they taper, the 10-year yield may move to 3 percent.”
The 10-year note yield rose 24 basis points on July 5 to 2.74 percent, the biggest jump since August 2011.
The term premium includes expectations for interest rates, growth and inflation and indicates the excess compensation for holding longer term Treasuries. A reading of zero on the term premium represents fair value. A negative reading suggests the securities are overvalued.
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