Taking Stock of the Round Trip in US Treasuries

Our new Treasury yield decomposition shows the term premium did most of the work in the 10y Treasury round trip since early September, while higher rate expectations drove the sell-off over the past year. The rise in trend rate expectations points to a higher level at which rates settle over time. Our new model takes a different view of where the term premium comes from, and it splits both parts of the yield further. Rate expectations divide into a slow-moving trend and a cyclical deviation from that trend. The term premium divides by the curve factor that drives it, i.e., its principal components, and by the type of risk it compensates. On both models, higher rate expectations drove the Treasury market sell-off over the past year. In contrast, our model shows that term premiums played the largest role in the Treasury yield round trip since early September, while the ACM model assigns nearly equal responsibility. Term premium swings fade over several months, so the round trip likely sa