What it is
The term premium is the extra return investors require for bearing the duration-risk and inflation uncertainty associated with holding a long-term bond, rather than repeatedly investing in short-term bonds over the same period. It compensates for the risk that interest rates might rise in the future, diminishing the value of a long-term bond, or that inflation could erode its real value over time.
A positive term premium contributes to an upward-sloping yield-curve, reflecting normal market conditions where long-term bonds yield more than short-term ones. A declining or negative term premium can flatten or even invert the yield curve, suggesting that investors are less concerned about future inflation or expect slower economic growth. The Federal Reserve monitors term premium as a gauge of market sentiment and financial-conditions.
Why it matters
Term premium influences long-term interest rates, affecting your mortgage costs and the attractiveness of long-duration investments relative to short-term savings.
Reviewed under editorial standardsUpdated September 26, 2026Not investment advice