Investors want more yield from owning long-term Treasury debt

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Investors demand more risk by buying long-term bonds rather than short-term debt.

The Fed’s measure of long-term market risk term installments On the

10 years

US Treasury bonds rose steadily in August. On Tuesday, it reached its highest point since November, rising to -0.1975%. The net change of 0.1463 percentage points was nearly four times the average daily absolute movement seen over the past three decades, according to Dow Jones Market data.

Various factors determine the payout on a 10-year bond, but the term premium is a key component. It is essentially the compensation, or additional return, that investors demand for holding long-term bonds rather than short-term debt. It reflects the possibility that unexpected economic developments or changes in monetary policy will change the value of a bond or a banknote. Long-term debt is more sensitive to such changes than short-term securities.

For the past two years or so, the premium term has always ended at less than zero, which means that investors are not asking for a premium.

And while the premium remains in the red – it stood at -0.52% on Wednesday, the latest day for which data is available – the recent rise signals a shift in perception around lending to the US government. This appears to be one of the factors behind the recent rise in yields on long-term debt.

The yield on the 10-year note rose to 4.339% on Monday, its highest level since late 2007.

The risk premium can rise because investors are factoring in a higher rate of inflation than they expected. It can also reflect uncertainty about the outlook for bond prices given the recent selling pressure. Japanese investors, who are the largest foreign holders of US government debt, now have more reason to sell Treasuries and buy Japanese debt as a result of the recent monetary policy shift by the Federal Reserve.

Bank of Japan
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Term insurance premiums also tend to rise in recessions. researchers Found. For example, since 2000, the largest increase in single-day Treasury premiums was observed in March 2020.

Fitch Ratings’ downgrade of the US debt default rating to AA+ from AAA on August 1 may be an addition to the current situation. suspicion. US Treasury bonds are the safest asset in the world, but discounting is still important. Torsten Slok, Chief Economist and Partner at Apollo Global Management, said: Barron.

Write to Karishma Vanjani at karishma.vanjani@dowjones.com.