Term Premium

Term premium means the extra return investors demand to hold a long-term bond instead of a series of short-term bonds. In simple terms, it is extra compensation for taking long-term interest rate risk. Term premium is important because it can affect long-term Treasury yields beyond expectations for future short-term rates. A rising term premium can push long-term yields higher and pressure stock valuations. For example, investors may demand a higher term premium if they are worried about inflation uncertainty or heavy government borrowing. Term premium is not directly visible. Economists estimate it, and different models can give different results.