Drivers of G4 Term Premium

Term premium has risen by 150-200bp across the G4 since 2021. The report introduces a new modelling framework to explain what drives term premium and what levels today's macro environment implies. It benchmarks term premium against expected inflation, macro and policy rate uncertainty, the cyclical position via unemployment, central bank bond holdings and fiscal risks, adding a dummy for the 2025 German fiscal regime shift. The framework explains around 70-80% of the recent increase, with bond supply from elevated deficits and smaller central bank balance sheets responsible for about half of the explained rise, while macro uncertainty and inflation explain most of the rest. The AI capex cycle brings upside risk by increasing debt supply and raising the sensitivity of yields to that supply, and successive post-pandemic supply shocks have eroded the hedge value of bonds. The model implies limited room for term premium to decline while macro uncertainty remains high and energy prices keep