Bond Traders Boost US Recession Bets as Growth Falters

Treasury investors are turning increasingly skeptical the Federal Reserve will deliver a soft landing for the US economy next year, elevating concern of a looming recession over the risks posed by inflation and a swelling budget deficit.

That’s the signal from the latest move in the so-called term premium, which describes the extra yield investors demand to own longer-term debt instead of rolling over shorter-dates securities as they mature.

The gauge, which is famously tricky to calculate, is a measure of protection against unforeseen risks such as inflation and supply-demand shocks, encapsulating everything apart from expectations for the path of near-term interest rates.

As recently as September, it was climbing above zero for the first time in more than two years as investors sent US yields to the highest in more than a decade after the Biden administration boosted bond sales and wrangled with lawmakers over the debt ceiling.

But in a reversal, the term premium has now dropped back below zero with the gauge for 10-year notes slipping to minus 1.7 basis points Friday, from a high of 48 basis points in late October, according to the New York Fed.