Rising Term Premiums: A Geopolitical and Policy-Driven Storm in Bond Markets

The U.S. Treasury market is undergoing a quiet revolution. Term premiums—the compensation investors demand for holding long-term bonds instead of rolling over short-term securities—have surged to levels unseen since the 2011 debt ceiling crisis. Yet this rise isn’t merely a reaction to Federal Reserve policy; it’s a symptom of deeper structural vulnerabilities rooted in Trump-era fiscal recklessness, institutional erosion, and global distrust. For investors, the message is clear: long-dated Treasuries are no longer safe havens. This is the moment to pivot toward shorter-duration assets and alternatives before the storm intensifies.

The Trump Legacy: Fiscal Expansion Without Discipline

The roots of today’s term premium surge stretch back to the 2016 election. Trump’s tax cuts, deregulation, and trade wars unleashed a fiscal binge that has yet to subside. The Congressional Budget Office (CBO) estimates the federal deficit will hit $1.6 trillion by 2024, with publicly held debt exceeding 100% of GDP—a post-WWII record. These policies, compounded by pandemic-era spending, have created a fiscal time bomb. Even hypothetical scenarios of a 2024 Trump re-election (as modeled in recent analyses) show deficits spiraling further, with term premiums rising by 11 basis points for every 1% increase in the deficit.

The problem isn’t just the numbers; it’s the signal they send. Investors now doubt Washington’s ability to enact fiscal discipline, particularly during election cycles. As the IMF warns, “Fiscal slippage during politically charged periods risks becoming permanent.” This erosion of institutional credibility—once a pillar of U.S. debt’s perceived safety—is forcing investors to demand higher compensation for long-term bets.

The Erosion of Trust: Why Foreign Investors Are Fleeing

Foreign central banks, once stalwart buyers of Treasuries, are retreating. Since 2013, their holdings have dropped from 25% to just 12% of total U.S. debt. The reasons? A cocktail of geopolitical friction, currency risks, and skepticism toward U.S. fiscal stewardship.

Trade wars and tariffs—notably Trump’s 2018 China tariffs—have alienated key economic partners. Meanwhile, the Federal Reserve’s delayed inflation response (remember the “transitory” misstep?) and the 2023 debt ceiling crisis deepened doubts about U.S. macroeconomic management. Add in the dollar’s persistent strength and inverted yield curves, and it’s no surprise that foreign investors are opting for safer bets elsewhere.

This exodus has structural implications. With shorter-duration Treasury issuance dominating, U.S. bonds are less sensitive to Fed rate cuts—a recipe for persistent term premium pressure. When central banks elsewhere begin easing more aggressively than the Fed, U.S. long-term yields could remain stubbornly elevated, even as short-term rates drop.

The New Risk Paradigm: Why Long-Dated Bonds Are Losing Their Luster

The data is stark: the 10-year Treasury’s term premium hit 0.8% by January 2025—the highest since 2011—and remains elevated at 0.5% today. Crucially, this premium now accounts for over half of the bond’s yield. Investors aren’t just pricing in rate expectations; they’re pricing in geopolitical and fiscal uncertainty.

Consider this: in 2023–2024, the term premium rose even as inflation retreated, proving that fiscal deficits and debt dynamics now outweigh inflation in driving long-term yields. The term structure of risk has fundamentally shifted.

For portfolios, this means long-dated Treasuries (e.g., 30-year bonds) are now double-edged swords. Their prices are increasingly vulnerable to rising premiums, while shorter-maturity instruments (e.g., 2-year notes) offer insulation.

A Call to Action: Shorten Durations, Seek Alternatives

The writing is on the wall. Investors must rebalance their fixed-income exposure to account for elevated and persistent term premiums. Here’s how:

1. Favor Short-Term Treasuries: The 2-year note, with its low duration, offers a buffer against rising premiums.
2. Diversify into Securitized Debt: Mortgage-backed securities (e.g., Fannie Mae pass-throughs) or corporate bonds with embedded options (e.g., callable debt) offer convexity benefits.
3. Allocate to Rate-Sensitive Sectors: Financials (JPM, MS) and industrials (CAT, DE) thrive in steeper yield curves.
4. Hedge with Inflation-Linked Bonds: TIPS (TIP ETF) protect against the fiscal inflation risks baked into term premiums.

Avoid long-dated Treasuries at all costs. A 10-year bond priced at 4.79% (as seen in January 2025) may look tempting, but its embedded premium leaves little room for error.

Conclusion: The Storm Is Here—Act Now

The term premium’s rise isn’t a temporary blip; it’s a structural shift fueled by geopolitical mistrust, institutional decay, and fiscal imprudence. Investors who cling to long-term bonds risk being washed away. The path forward is clear: shorten durations, diversify into resilient assets, and prepare for a new era where U.S. debt’s safety is a relic of the past.

The clock is ticking. The next Fed easing cycle may not save long-dated Treasuries—only disciplined portfolio adjustments will.