Bond Traders’ Angst Seen as Term Premium Turns Positive

  • Array of uncertain outcomes under Trump prompting selloff
  • Increased debt issuance assumed to finance spending plans

Bond traders have had enough. For the first time since the start of the year they’re demanding a premium for holding long-term debt after Donald Trump’s election victory ratcheted up expectations for U.S. economic growth and inflation.

The term premium for 10-year Treasuries, which represents the extra compensation investors demand to hold the debt instead of a series of shorter-dated notes, turned positive Monday for the first time since January. The measure was at about 0.01 percentage point as of Nov. 15, after rebounding from a record low of about negative 0.75 percentage point in July, Federal Reserve Bank of New York data show.

The measure, a product of the perceived riskiness of longer-dated securities, fell below zero for the first time in more than four decades in 2012. Former Federal Reserve Chairman Ben Bernanke wrote in a blog post last year that the Fed’s bond purchases, low global inflation and central banks’ accommodative policies had helped drive the gauge to abnormally low levels. Now, Trump’s spending proposals, which traders speculate will swell deficits, are contributing to the term premium’s reversal.

“There is really very little clarity about what the details of any of Trump’s policies will really look like going forward, with a huge array of possible outcomes,” said William Marshall, an interest-rate strategist at Credit Suisse Group AG in New York. “There will potentially be much more Treasury supply. So, we have a big injection of uncertainty, and in a world with more uncertainty it makes sense to demand more premium for risk.”

The president-elect’s pledges include tax cuts and spending $500 billion or more over a decade on infrastructure. His proposals would boost the nation’s debt by $5.3 trillion, the nonpartisan Committee for a Responsible Federal Budget estimated. The government’s marketable debt has already more than doubled under President Barack Obama, to a record of almost $14 trillion.

Yields on Treasuries have surged following the election as the prospect of fiscal stimulus triggered bets the Fed will lift its policy rate faster than previously expected. The benchmark 10-year Treasury note yield reached 2.3 percent this week, the highest since December.

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