The Lombard Review
Politics

Election jitters push up long-term rates

Fiscal uncertainty lifts term premium

The north façade of the White House
The north façade of the White HousePhoto: Nishkid64 / Wikimedia Commons, Public domain
1 min read Data: ACM 10Y term premium >0

With the US presidential election approaching, fixed-income markets have succumbed to acute fiscal anxiety. Benchmark ten-year Treasury yields have surged above 4.20 per cent, driven almost entirely by an expansion in the term premium. The Tobias Adrian-Crump-Moench (ACM) term premium metric has pushed decisively back into positive territory.

The U.S. Treasury Building, Washington
The U.S. Treasury Building, WashingtonPhoto: MeanieHyaena / Wikimedia Commons, CC BY 4.0

Pricing the Deficit Deluge

Investors recognise that regardless of whether Donald Trump or Kamala Harris secures the White House, federal fiscal deficits will remain historically anomalous, requiring the Treasury to issue trillions in new sovereign debt. Bond investors are refusing to hold thirty-year duration without receiving a substantial risk premium to compensate for fiscal dysfunction and potential inflation. The bond vigilantes are demanding protection.

The Lower Manhattan skyline from Liberty Island
The Lower Manhattan skyline from Liberty IslandPhoto: Percival Kestreltail / Wikimedia Commons, CC BY-SA 3.0

Surging long-term bond yields ahead of the presidential election prove that sovereign debt markets have begun pricing in the permanent fiscal costs of an unconstrained sovereign deficit.