LONDON, Nov 8 - If the notorious 'term premium' is evaporating again, then last month's bond rout may just have been a nightmare.
Rising yields have continually drawn investors - who appear to have loaded up on bonds for much of the year to lock in the highest fixed-rate coupons in more than a decade. Their faith in Treasury yields cresting around 5% was underpinned by data on ebbing jobs growth and related bets on the Fed moving to cut rates by the middle of 2024.
While it can involve extrapolating current market stress, it typically points to debt supply concerns. In this instance, it seems to have riffed off multi-year U.S. deficit projections, a fiscal impasse in Congress and a gradual withdrawal of the Fed as buyer as it winds down a pandemic-bloated balance sheet via 'quantitative tightening'.
How much does this ephemeral premium matter, or is it just getting swept along with the ebb and flow of the market? The upshot, presumably, is that if the term premium were to return to historical norms, that added tightening of financial conditions may mean the Fed can dial back accordingly. But if the premium disappears once more - the Fed may have to resume its slog and to hang tough to see inflation fall further.
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