US Treasury 10-year term premium turns positive

By Davide Barbuscia

NEW YORK, April 26 (Reuters) - The U.S. Treasury 10-year term premium, a measure of the compensation investors demand for holding long-term government bonds, has moved back into positive territory this week as yields touched fresh highs on inflation concerns.

Term premiums, which can hurt assets such as stocks when they rise, have been suppressed for about a decade amid low interest rates that followed the 2007-2009 global financial crisis and the COVID-19 pandemic.

They turned positive last year as widening fiscal deficits and higher government bond issuance helped lift long-term Treasury yields, which move inversely to prices. But as bonds rallied late last year on expectations interest rate hikes had peaked, the measure went back to negative.

In recent days, the 10-year term premium has turned positive again, according to a New York Fed gauge. It stood at 0.028% on Wednesday, and it had turned marginally positive already on April 16 for the first time since late November.

This was likely the result of multiple factors, from long-term fiscal concerns to questions about the Federal Reserve's commitment on stamping out inflation, said Campe Goodman, lead portfolio manager of the Hartford Strategic Income Fund.

The prospect that the central bank could be satisfied with bringing core inflation back to a level which is above its 2% target "would put a little premium in the long end," he said.

Benchmark 10-year yields surged to a high of 4.739% on Thursday, their highest level since early November, after data showing that a measure of inflation rose more than expected in the first quarter, even as growth was weaker than thought.

U.S. bond asset manager PIMCO said earlier this year it expected term premiums to shoot up again amid sticky inflation and rising fiscal deficits.

Together with a much-anticipated shift of the Fed to lower interest rates, rising term premiums could push the Treasury yield curve - parts of which are currently inverted because some short-term bonds yield more than longer-dated ones - to correct itself, PIMCO said at the time.

(Reporting by Davide Barbuscia; Editing by Andrea Ricci)