Term Premium Eases, For Now — But What’s Driving It?

Term premium over the last two weeks has finally backed off from its recent highs — a welcome development that’s brought some relief to bond investors. Part of the move lower in yields can be explained by the growing softness in U.S. economic data, which we believe is only just beginning. JOLTS and ADP figures are already painting a picture of a cooling labor market, and with that, reduced wage pressure. We think this incoming string of weaker data will give the Fed cover to accelerate the pace of rate cuts — which, all in, will help ease financial conditions.

Chart 1.a: Term Premium falling is what risk needs to breath further.