‘Term Premium’ Sends a Message. Inflation Isn’t What Bond Investors Fear Most.

by Karishma Vanjani
Barron’s

An unusual situation has unfolded in the U.S. Treasury market, where investors are expecting lower inflation in the distant future, yet demanding better returns to buy and hold bonds.

The yield on U.S. government debt maturing in 10 years slipped by 0.038 percentage point to 4.322% on Tuesday, calming down after marking its biggest weekly gain since the end of the 2001 recession last week. Sales of U.S. debt are pushing down prices and raising yields; yields and bond prices are inversely related.

Last week, Wall Street mainly blamed the surge on foreign central banks selling bonds and the unwinding of a complex, highly leveraged hedge fund strategy called the basis trade. Both were difficult-to-measure variables, partly because transactions by both groups are opaque.

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