For most of the post-GFC era, owning long-dated Treasuries paid you almost nothing extra over rolling shorter paper. That was weird. It was also new.
The term premium, the compensation a buyer demands for locking up money in a 10-year bond instead of rolling 3-month bills, sat negative or near zero from roughly 2014 through 2022. Eight or nine years of free duration, depending on how you measure. That was the regime. Equity multiples baked it in, mortgage rates compressed against it, pension funding ratios assumed it, and the 60/40 portfolio printed money inside it.
Then the regime broke. Slowly at first, then all at once. The structural shift that started after the 2022 inflation shock isn't reversing, and most allocators are still positioned for the old world.
What Term Premium Actually Measures, And Why It Matters
Term premium is the gap between the yield on a long-dated Treasury and what you'd earn rolling a sequence of short-term bills over the same period.
If 10-year yields trade at 4.5% and the market expects average overnight rates of 4.5% over the next decade, the term premium is zero. If long yields trade at 5% with the same expectation, the premium is 50 basis points. That's the price of duration risk. The compensation for not knowing what inflation, fiscal policy, or the Fed will look like in 2034.
Estimating it is messy. The New York Fed publishes the ACM model. The San Francisco Fed publishes a different one. They disagree by 50 to 100 basis points routinely. So when traders argue about term premium, half the time they're arguing about which model.
The point isn't the exact number. It's the regime. From 1990 through 2010, term premium averaged around 150 basis points on the 10-year. From 2014 to 2022, it averaged roughly negative 50. That's a 200 basis point shift in how the market priced duration. Over a decade.
And now it's back. ACM puts the 10-year term premium somewhere in the 30 to 80 basis point range as of early 2026.
That's still well below the long-run average, but it's an entirely different world from the negative readings of the 2010s.
A Decade Of Negative Premium Distorted Almost Every Asset Class
Here's what gets missed in the bond-market version of this story. When term premium goes negative, it isn't just Treasury holders who get hurt or helped. Every asset that gets priced off Treasury yields shifts.
Equity multiples expand. Discounted cash flow models use the 10-year as a starting point, and if duration risk is free, future cash flows look more valuable. The Nasdaq 100 traded above 30 times forward earnings for years partly because of this. Long-duration tech, profitless growth, anything where most of the value sits in year five or ten, got disproportionately rewarded.
Mortgage spreads compressed. The 30-year mortgage rate is roughly the 10-year Treasury plus a spread for prepayment risk and credit. If the 10-year is artificially low because term premium is negative, mortgage rates stay low even when the Fed is technically tight. That's part of why housing didn't break in the 2018 hiking cycle.
Pension funding ratios bent. Defined-benefit plans discount future liabilities at rates tied to long bonds. Lower long yields means higher present-value liabilities, which means underfunded plans, which means corporate sponsors pumping cash into pension contributions instead of capex or buybacks. Some of the buyback boom in the late 2010s was actually pension contributions getting reclassified.
Dollar carry trades got cheaper. Yen-funded EM trades, euro-funded equity overlays, all of them ride on the assumption that long-end US yields stay anchored. Take that anchor away and the math gets wobbly fast.
So the distortion wasn't a Treasury-market phenomenon. It was a financial-system phenomenon. And reversing it isn't going to be clean.
Why The Premium Came Back, And Why It Won't Leave Quickly
Three structural shifts brought term premium back. None of them look reversible on the relevant horizon.
First, fiscal supply. US Treasury net issuance ran near $2 trillion a year for several years post-2022. The deficit settled into a high single-digit percent of GDP even with full employment. Every dollar of net issuance has to clear at some price, and price-insensitive buyers got smaller while price-sensitive buyers got bigger. Hedge funds doing basis trades, pension funds doing LDI, and households via money funds are now the marginal bid. They demand compensation for duration. They got it.
Second, the foreign holder mix changed. China's Treasury holdings dropped from a peak above $1.3 trillion to under $800 billion. Japan stayed roughly flat in nominal terms while their FX hedge costs ate most of the carry. The Saudi/GCC complex shifted toward gold and direct equity stakes instead of just adding paper. The Bank of England and ECB became net sellers as they ran down crisis-era holdings. Foreign official sector demand, the price-insensitive bid that used to soak up trillions, just isn't what it was.
Third, the Fed went from buyer to seller. QT pulled hundreds of billions out of the duration-absorbing capacity of the system. Even with the pace slowing in 2024 and 2025, the System Open Market Account is still smaller than it was at peak. The Fed isn't bidding on the back end of the curve anymore. That bid has to come from somewhere else, and somewhere else wants to get paid.
Stack those three together and you get a structural rebuild of term premium that's mechanical, not narrative. It's not about a single CPI print or a single auction. It's about a regime where duration is no longer free.
I don't know exactly where the new equilibrium settles. My guess is something between 100 and 175 basis points on the 10-year, which is below the pre-GFC era but well above the 2014-2022 anomaly. We're not there yet.
How A Live Term Premium Reshapes The 60/40 Portfolio
The 60/40 worked for forty years partly because bonds rallied when stocks sold off. That correlation isn't a law of physics. It's a function of inflation regime.
When inflation is low and stable, bad growth news drives the Fed to ease, yields fall, bonds rip, and the 60/40 hedges itself. That was 1990 through 2020 mostly, with a few interruptions.
When inflation is unanchored, bad news can mean either growth weakness or supply shock. If the supply shock dominates, yields rise even as stocks fall. The 60/40 stops hedging. It just compounds the loss. We saw the live version of that in 2022, when bonds and stocks both took double-digit drawdowns simultaneously. The traditional risk parity portfolio puked.
A higher term premium makes that scenario more likely to repeat. Why? Because term premium is partly a function of inflation uncertainty. When the market thinks inflation could plausibly run anywhere from 2% to 5% over the next decade, the premium for taking that bet goes up. And when realized inflation comes in toward the high end of that range, bonds sell off without the equity hedge kicking in.
Wait, actually. Let me sharpen that. The hedge doesn't disappear permanently. It still works in growth-shock recessions. It stops working in supply-shock environments. So the 60/40 isn't dead. It's just no longer reliable as the all-weather default it was sold as.
What this means in practice for allocators. Bonds still belong in the book, but the size and the maturity matter more. Short-end Treasuries got tagged less by 2022 because they have less duration. Long-end Treasuries got run over hard. Anyone who held the Bloomberg Aggregate index expecting a hedge got the opposite.
What Higher Term Premium Means For Equity Valuation
Forward multiples don't get to live forever above 22 times earnings if the 10-year sits at 5% with positive term premium. The math just doesn't work without earnings growth doing the heavy lifting.
Run the numbers loosely. If long yields settle at 4.5% with 75 basis points of term premium, the equity risk premium that justifies a 20x forward multiple needs to be doing real work. In the 2014-2022 regime, you could get there with 250 basis points of equity risk premium. In a 2026 regime with a live term premium, you probably need closer to 400 basis points, which means either earnings have to grow faster or multiples have to come in.
The path of least resistance for equity indices is sideways volatility, not a one-shot crash. Earnings keep growing, multiples slowly compress, and the index ends a few years out roughly where it started. Japan did this from 2000 through 2012. The S&P did something similar from 1968 through 1982.
Where it bites hardest. Long-duration assets. Profitless growth. Software at 15x sales. Biotech with revenue still in clinical trials. Anything where the cash flow story sits in 2032 or later. Those got the biggest tailwind from negative term premium and they take the biggest headwind when it comes back.
Where I'm Watching The Tape For Confirmation
A few specific things I track to confirm the regime shift is sticking.
ACM 10-year term premium readings above 50 basis points on a sustained basis. The model bounces around month to month. What matters is whether it spends most of a year above zero versus below.
Treasury auction tails. When the 30-year auctions tail by more than 2 basis points consistently, it tells you the dealer community is getting paid to take down supply. When tails compress, the marginal buyer is back in. The 30-year tail history through 2024 and 2025 has been ugly more often than not.
The 5y5y forward inflation breakeven. If it stays anchored above 2.3%, term premium has a reason to hold. If it drifts back to 2.0% and stays there, the case for higher premium gets weaker.
Foreign official Treasury holdings. The TIC data lags by two months but it's still the cleanest read on whether China, Japan, and the GCC complex are adding or trimming. Three quarters of net selling in a row would be a meaningful tell.
Dealer balance sheets. Primary dealer Treasury inventories above $300 billion mean dealers are stuffed with paper they can't move. That's a higher-premium signal. When inventories drop to $150 billion, the system has absorbed the supply and yields can compress.
None of these alone tells the whole story. Together, they form a picture. And the picture I've been seeing through 2024 and 2025 is consistent with a structural rebuild that hasn't fully played out yet.
Positioning For A Regime That Most Allocators Are Still Underwriting
If term premium stays north of 50 basis points for years rather than reverting to the 2014-2022 negative range, several things follow.
Bonds aren't a free hedge anymore. The duration in a long bond position pays a coupon but takes capital risk that correlates with equities under stress.
Equity multiples have a ceiling that's lower than the post-2014 norm. Not crash-low, but compressed.
Real assets, gold, commodities, real estate income, sit on the right side of the regime. They got punished during the negative term premium era because nominal yields stayed low and the cost of carry on real things felt expensive. With premium back, the math flips.
Cash matters again. Sitting in 4% T-bills isn't a drag on a portfolio when the alternative is owning duration that might draw down 15% if the next inflation print runs hot.
Here's the thing. Most institutional portfolios were built between 2010 and 2020. The risk models, the asset allocation defaults, the glide paths in target-date funds, all of it was calibrated to a regime where bonds were a reliable hedge and term premium was negative. Re-calibrating takes years. Investment committees are slow. Consultants who ran 60/40 for fifteen years don't pivot in one quarter.
That's the opportunity and the risk. The regime change is structural. The repositioning is gradual. Anyone who reads the shift early and sizes for the medium term gets compensated. Anyone who keeps running the playbook from 2014 gets stuffed.
At Kunkel Capital Research, we treat term premium as one of the core macro state variables that shapes how we size and hedge across asset classes. The work isn't predicting the next 25 basis point move on the 10-year. It's positioning for a world where duration is no longer free, equity multiples have less air under them, and the correlation between stocks and bonds doesn't behave the way the textbooks promised. That world started two or three years back. Most portfolios haven't caught up.
Last updated: April 2026
