Investors are demanding more to take the risk of buying longer-dated bonds rather than short-term debt.
Various factors decide the payout on a 10-year note, but the term premium is a key element. It is basically the compensation, or added yield, that investors demand to hold a long-term bond rather than short-term debt. It reflects the possibility that unexpected economic developments or changes in monetary policy may alter the value of a bond or note. Long-dated debt is more sensitive to such changes than shorter-term securities.
While the premium is still in the red—it settled at negative 0.52% on Wednesday, the latest day for which data are available—the recent rise signals a shift in perception about lending to the U.S. government. It appears to be a factor behind the recent rise in yields on longer-dated debt.The risk premium could be rising as investors factor in a higher rate of inflation than they had anticipated. It could also reflect uncertainty over the outlook for bond prices given recent selling pressure.