They seemed to have contributed to an increase in the
term premium, which likely reflected, in part, changes in the expected global supply of and demand for safe bonds, as well as investors' cautious reappraisal of the risks surrounding the medium-term inflation outlook.
I intend to argue that, at least in the euro area, empirical evidence suggests that the amount of purchases needed to deliver a given compression of the
term premium is likely to fall over time as the acquired stock of assets increases.
Third, investors appear to be demanding a higher
term premium in the face of rising inflation expectations - the
term premium is the additional compensation demanded by investors for holding a long term bond over a short term bond.
Referring to that spread, Kathy Jones, chief fixed income strategist at the Schwab Center for Financial Research, noted at a recent meeting that the
term premium for long-term Treasuries, adjusted for inflation, is currently negative.
He recalled a paper by Kiley in which he argued that a drop in longterm interest rates brought about by a decline in the
term premium has an effect on aggregate demand that is about half as large as a drop in long-term interest rates caused by a lowering of the federal funds rate.
Since the goal of QE was to ease financial market conditions largely by reducing bond yields, most event studies have focused on how two bond premiums, the
term premium and the risk premium, respond to announced changes in the asset purchase programs.
In other cases, taxpayers may use the uniform one-year
term premium (P.
The size of the
term premium reflects the expected volatility of the interest rate--because higher rate volatility increases the likelihood of large bond price swings--and the degree of investors' risk aversion.
We also studied a decomposition of the yield curve and found that the lack of significant effect on Treasury yields was a result of the offsetting effects of surprises on the
term premium and risk-neutral yield.
Bahrain Petroleum Co (Bapco) is asking for a
term premium of $4.
Perhaps because of capital inflows into local EM bond markets, even short-term rates in EMs now seem to respond to changes in the
term premium in US dollar markets.
75 trillion asset purchase (QE1) should have reduced the
term premium by about 52 basis points and the 10-year Treasury yield by about 82 basis points.
