The 10-year Treasury yield at 4.28 percent on the June 30 close is not a single number the market negotiates against a Fed policy rate. It is two numbers stacked. The first is the average expected fed funds rate over the next ten years, the piece the market and the Fed are largely aligned on. The second is the term premium, the extra yield investors demand to hold a ten-year note rather than roll one-month bills for the same period. The term premium is the piece the Fed does not set. It is the piece Treasury supply, foreign demand, and duration-risk pricing set, and it has been the variable driving the back end of the curve since 2022.

What the number is

The term premium is the compensation an investor requires for bearing the risk that the actual path of short rates differs from the expected path. If the market expected the fed funds rate to average exactly 3.86 percent over the next ten years and demanded zero compensation for uncertainty, the 10-year Treasury would trade at 3.86 percent. Any yield above that expected-path number is term premium.

The concept sits inside the pure expectations hypothesis. That hypothesis, in its strictest form, says long yields are just the geometric average of expected short yields. The hypothesis fails as a description of markets because investors are not indifferent to holding a ten-year piece of paper versus rolling short-term bills. They demand payment for the risk. The term premium is the size of that payment.

The ACM read

The New York Fed publishes the Adrian-Crump-Moench term premium series daily on its Treasury yield curve modeling page. The ACM model decomposes the entire nominal yield curve into an expected-rate component and a term premium component using a five-factor affine term structure model, updated with each day’s yield curve data.

The June 30, 2026 read has 10-year term premium at 42 basis points. The five-year term premium at 21 basis points. The two-year term premium at 6 basis points. The 30-year at 63 basis points. The premium rises with maturity, which is the standard shape when duration risk is being priced positively.

Historical anchors matter. The 10-year ACM term premium averaged 154 basis points from 1990 through 2007, ran negative from 2016 through 2021 (bottoming at minus 88 basis points in August 2019), and has climbed steadily since November 2021. The 42 basis point read is above the twenty-year rolling average of 30 basis points but well below the pre-GFC norm.

What moves the line

Three inputs explain most of the variance in the 10-year term premium on quarterly and annual frames.

Treasury supply is the first. The federal deficit runs about 6.4 percent of GDP on the trailing four quarters through Q1 2026. Net Treasury issuance for fiscal year 2026 is on track for $1.9 trillion in notes and bonds, up from $1.4 trillion two years ago. The Treasury Borrowing Advisory Committee minutes have flagged the coupon share of that issuance as sitting above the historical 15 to 20 percent guidance band for bills-as-share-of-total. A market being asked to absorb rising coupon supply demands a higher term premium to clear.

Foreign official demand is the second. Foreign holdings of Treasuries at $8.5 trillion in the April TIC report are up in dollar terms but flat as a share of outstanding marketable debt. The share was 34 percent in 2015, 24 percent through 2022, and 22 percent in the April read. Foreign central banks are not net sellers, but their bid at long-duration auctions has softened over the last decade. That softening pushes more of the auction take-down onto price-sensitive domestic buyers, who require premium.

Duration risk pricing is the third. The MOVE index, the fixed-income equivalent of the VIX, has run in the 85 to 105 band through 2026 against a 60 to 80 band pre-2022. Higher realized and implied volatility on rates makes the option-value of holding a longer piece of paper more expensive. Term premium captures that.

What the June 2026 SEP said, and did not say

The June 2026 Summary of Economic Projections set the median longer-run federal funds rate at 3.0 percent. That is the FOMC’s read on the neutral policy rate over the medium run. Add a 2 percent inflation target and the implied nominal expected short rate anchor is 5 percent nominal, or 3 percent real.

The 10-year Treasury at 4.28 percent minus a 42 basis point term premium reads an implied average expected short rate of 3.86 percent over the next ten years. That number sits 14 basis points above the SEP-implied 3.72 percent (median longer-run funds rate 3.0 percent plus the FOMC’s implicit expected inflation path). The gap is inside the historical noise band but tilts market pricing slightly hawkish of the median dot on the longer-run frame.

The SEP does not print a term premium projection. The FOMC deliberately treats term premium as an exogenous input, not a target. Powell said as much in the June 17 press conference: “The term premium is not something the Committee sets, and not something we would target directly. It is an input to financial conditions that we observe and account for.”

What a 20 basis point move in term premium does

The rates desk translates a term premium move into a curve move using the ACM factor loadings. A 20 basis point rise in the 10-year term premium, holding the expected short rate path constant, adds roughly 8 basis points to the 5-year yield, 20 basis points to the 10-year, and 26 basis points to the 30-year. That is a steepening curve on unchanged Fed policy expectations.

Financial conditions indexes weight the 10-year Treasury heavily. The Goldman Sachs U.S. FCI moves about 4 basis points looser or tighter per 10 basis point move in the 10-year yield, holding equity, credit, and dollar inputs constant. A 20 basis point rise in term premium tightens the GS FCI by about 8 basis points, mostly through the mortgage and corporate borrowing channels rather than through Fed-controlled short rates.

Why the number sits above the twenty-year average

The 30 basis point twenty-year average includes the 2013 to 2021 window when quantitative easing and negative real yields overseas compressed term premium globally. The Fed’s balance sheet absorbed the largest source of duration risk during that stretch. Quantitative tightening, which began in June 2022 and has run at $60 billion a month since 2024, is the mechanical reversal.

The Federal Reserve balance sheet ran $8.9 trillion at the April 2022 peak. It sits at $6.6 trillion in the June 25 H.4.1 release. That $2.3 trillion of Treasuries and mortgage-backed securities not being held by the Fed is duration that has been re-priced back into private-sector portfolios. The 42 basis point current print, relative to the 30 basis point twenty-year average, is roughly the size of the duration-risk repricing since QT began.

The line worth watching is the trajectory. Term premium at 42 basis points is not a crisis reading. Term premium at 100 basis points, the norm through the 1990s and early 2000s, would be. The distance between the two levels is roughly the difference between “supply is being absorbed at reasonable clearing prices” and “supply is dictating the clearing price.”

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