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March 24, 2017

From the Vault: Factor This In

In May 2014, Liberty Street Economics bloggers shared a new approach for calculating the Treasury term premium as well as a link for downloading their estimates of it. It has been gratifying to see the “ACM” model (named for current and former New York Fed economists Tobias Adrian, Richard Crump, and Emanuel Moench) make eye-catching headlines, and become “increasingly canonical,” as one reporter described it.

Bloomberg, for example, traced the economists’ estimate of the term premium on ten-year Treasury securities into negative territory for much of 2016 (“JFK Was Last President to See Treasuries with Lower Term Premium”) and then back above zero in November (“Bond Traders’ Angst Seen as Term Premium Turns Positive”). FTAlphaville, in “Trust, Treasuries, and Trump,” used the data to identify the biggest one-day increases in the term premium since 2000—among them the day after the 2016 U.S. elections—finding “an odd bunch . . . mostly related to fiscal matters.”

Their estimates of the term premium, which the economists define as capturing “the compensation that investors require for bearing the risk that short-term Treasury yields do not evolve as expected,” surface in policy dialogue, too. On his blog for the Brookings Institution, former Federal Reserve chairman Ben Bernanke charted the term premium’s sharp decline since 2014 as part of broader consideration of how a low term premium is holding down longer-term interest rates.

The term premium is not straightforward to calculate. Our bloggers’ estimates are obtained from a “five-factor, no-arbitrage term structure model” that allows them to break down the Treasury yield into its component parts. This decomposition lets them consider how movements in Treasury yields are jointly affected by changes in the expectations for the future path of short-term interest rates and the term premium.

Term structure modeling has numerous applications. Further analysis on the blog pointed to its relevance for very-long-run planners, such as Social Security program stewards. In “Discounting the Long Run,” our bloggers demonstrate that, given the absolute size and time-varying nature of term premia, it’s crucial to employ “risk-adjusted” yields in any far-into-the-future projection of a program’s financial health.

Elsewhere on our blog, authors used the ACM model to explain fifteen significant bond market selloffs—for example, finding that the 2013 “taper tantrum” was driven nearly entirely by changes in the term premium rather than changes in the expected path of short-term interest rates.

The ACM Treasury term premia estimates for various maturities are available on the New York Fed website. Find data at daily and monthly frequencies from 1961 to the present here. For a quick read, check out our regular charting of movements in longer-term Treasury yields and the ACM term premium in the financial markets section of U.S. Economy in a Snapshot, a monthly chart pack from our economists.

Reading List:

Treasury Term Premia: 1961-Present
Tobias Adrian, Richard Crump, Benjamin Mills, and Emanuel Moench

Do Treasury Term Premia Rise around Monetary Tightenings?
Tobias Adrian, Richard Crump, and Emanuel Moench

The Recent Bond Market Selloff in Historical Perspective
Tobias Adrian and Michael Fleming


The views expressed in this post are those of the author and do not necessarily reflect the position of the Federal Reserve Bank of New York or the Federal Reserve System. Any errors or omissions are the responsibility of the author.

Anna Snider is a cross-media editor in the Federal Reserve Bank of New York’s Research and Statistics Group.

How to cite this blog post:

Anna Snider, “From the Vault: Factor This In,” Federal Reserve Bank of New York Liberty Street Economics (blog), March 24, 2017,

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The editors are Michael Fleming, Andrew Haughwout, Thomas Klitgaard, and Asani Sarkar, all economists in the Bank’s Research Group.

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