The Price of Money Has a Sharply Rising Trump Premium

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The bond market is giving everyone the heebie jeebies again, and a new phrase is beginning to enter the non-finance brained lexicon. Trump has helped teach a lot of us how interest rates, also known as bond yields, reflect inflation expectations, but there’s a lot more that goes into the number that determines your mortgage and all the interest rates you pay than just how much the plastic wrap enveloping the globe costs. Term premium can crudely be seen as a temperature gauge on bond traders, and how much they are feeling the heebie jeebies.

Any schmuck can lend the United States government money for one year at a current yield of 4.467% and expect to get their money back, plus a chunk of interest, and be fine. Lending money to the government for ten years is another story entirely. Inflation takes time to take root in the market, and yields are reflective of growth and inflation expectations over the associated period, so you can much more safely assume that inflation won’t derail your investment on a one-year bond relative to a ten-year bond.

The real return you get on bonds is just the yield minus inflation, so if you buy a ten-year U.S. Treasury Bond paying a current rate of 5.257% (!!!), and the last headline CPI figure was 3.4%, you are currently getting about a 1.86% real return on your money. You buy the bond because in part, you are betting (or hoping) that inflation will go down and that real return will go up. 

But if some idiot starts an unwinnable war in a famed oil chokepoint and inflation rises to 4.4%, you now have a 0.86% real return on your money that’s locked in to a ten-year loan starting on the date you made it, and the risk that something like this could happen is called duration risk. It’s just a fact of life and linear time that things change and interest rates do too. Term premium is effectively the number that the bond market puts to how worried they are about this unknown fact of life ruining their carefully calibrated investments. That number is currently the highest it has been since 2010 by one Federal Reserve estimate.

The way this number works is it is modeled, and so there are different models putting different numbers to it, but as of late, they all point in the same direction: up, quite a lot in recent weeks. The models look at multiple ways of loaning the government money for ten years. One path is how you can just buy a ten-year U.S. Treasury and get paid interest until you get your money back in 2036, but another is how you can buy ten one-year U.S. Treasuries in a row, and collect interest over a decade that way. What term premium does is reflect how the market is pricing the risk of giving the government money now and not seeing it for ten years, versus the more flexible short-term loans that allow you to peace out of the trade after three years if the shit hits the fan.  

The tell as to the importance of this chart is the contrast between today and 2020. When everything felt like it was falling apart, Treasuries became more valuable, and this number went negative as the market was willing to pay a premium to trust the United States government with its money over the long term. Now the market is charging the United States government an additional premium beyond the basic inflation expectations plugged into every bond. We are in some ways, being charged a higher interest rate because this dumbfuck in the Oval Office has no idea what he’s doing.

Trump declaring an imminent end to the Iran War is the new infrastructure week, and while the smoothbrained louts who populate national media credulously feed these near-weekly lies to their viewers as if they haven’t heard them before, the smart money in the bond market has quite literally not bought them. I am no bond expert and there are countless complexities that go into the price of money in the largest, most liquid market in the world, but I also think you can probably surmise why this term premium has risen by zooming in on the chart and seeing how it hit a local bottom right before Trump bet the economy on the Iran War at the end of February.

Term premium and inflation expectations are different variables that go into the price of a bond, so the uncertainty here is a macro uncertainty that perhaps inflation expectations are wrong. Perhaps the war will go on far longer than the market anticipates. Maybe tomorrow is when Trump invades Greenland. Or what if Trump wakes up after a midterm rout and throws a temper tantrum by bombing Toronto? The foreign policy adventurism of the Trump Administration is itself a pressure valve on the price of money, jacking it up simply because no one can figure out why they are doing what they are doing in a realm tied to the price of oil and fertilizer and other vital commodities, and how you cannot trace anything resembling logic from it. Having a country run by idiots like Pete Hegseth with no friends and no plans is expensive, in short. 

And it’s not just Iran and foreign policy fueling this move. You can see a steeper rise in the chart as of late that has its own inherent logic. “The bond market is no longer waiting for the Fed to tighten financial conditions,” said Florian Ielpo, head of macro at Lombard Odier Investment Managers, to Bloomberg. “High term premia, inflation uncertainty and government borrowing needs can keep longer-dated yields restrictive even when the expected path of short rates becomes less aggressive.”

New Fed Chair Kevin Warsh famously spooked the bond market earlier this year by saying the bond market is doing his job for him, but you can also look at this rise in term premium as proving that speech right through a vote of no confidence in the entire Trump financial regime. Add in the fact that today, Trump is again going after Fed governor Lisa Cook, reminding traders that the hallowed independence of the Fed never stopped being at risk. That risk is being priced into the bond market, and then into all our various interest rates. That’s what the charts above are showing.

The deficit is a big story here too. Unfortunately, the lone thing liberals, lefties and Dick Cheney agreed on, that “deficits don’t matter,” is no longer true in a world where we pay more on annual interest expense than we do for Pete Hegseth’s Pentagon. We do have to become deficit scolds to some degree, because otherwise, the bond market will charge us higher interest rates and make it more difficult to fund the future rebuilding effort out of this mess. The Congressional Budget Office projects a $1.9 trillion deficit for 2026, and Trump’s One Big Beautiful Bill adds $4.7 trillion to deficits through 2035.

Trump’s tariff money was supposed to offset some of those costs, but in the wake of the Supreme Court striking down his illegal tariffs, a significant chunk of that $3 trillion in offsetting revenue is gone, injecting more uncertainty into the market. Trump is trying to anoint himself the ZIRP god-King of the world and declare a 0% Fed Funds Rate by fiat, all while the 30-year Treasury Bond yield has been up only to its current 24-year highs since traders realized he could really win in September of 2024. 

“It’s not a simple story,” said Stephen Douglass, chief economist at NISA Investment Advisors, to Bloomberg. “But I would say that I think we are in a rising term-premium environment.” French bonds recently went through a difficult period that is rattling the Euro, and so some of this recent rise in term premium could be due to spillover from that. Or it could be spillover from the ongoing U.K. bond woes. Or spillover from the uncertainty and tumult of Japanese debt and the falling yen. Or, or, or…

We live in a society, as the meme goes, and it’s one built on the back of Western bonds and an integrated Japanese government leveraging its own debt to the moon. A lot of things are happening right now, and although it can feel like any one headline is ready to plunge us into 2008 2.0, it’s important to note that economic growth is in good shape, and elevated interest rates could reflect future growth expectations too. Plus, with bonds, it takes some time for things to break, and time can heal wounds in this market. The speed and sustainability of moves like this current one punching the sky is what can really cause things to break.

The reason everything broke in 2008 is because we had an Oops, all fraud! financial economy, and we woke up one day and realized Lehman Brothers wasn’t worth a pack of gum. This entire column has been about investors pricing in the uncertainty of America in 2036, long after perhaps It Happens and the Strait of Hormuz is open and we are rid of this gelatinous ooze flooding the Oval Office. We cannot predict the future, despite that being the task of a bond trader, and what they are telling us with their own money is that the uncertainty created by Trump and **gestures everywhere** is going to keep interest rates elevated–independent of inflation expectations–for the foreseeable future.

Still here. Still without airbrushing. Still with teeth.