Weekly Signal & Noise Filter
The TP Freak Off is Likely Not Over
Term premium, not toilet paper.
As discussed in the prior Signal & Noise Filter, price action in 10-year nominal notes is being primarily driven by an expansion in the term premium (“TP”).
There have been two prior notable TP expansions in this cycle that this note will explore and contextualize to see what can be inferred about the current episode. Rest assured, dear reader, this will not be an exercise in technical analysis voodoo applied to Tp’s.
We start with a pretty picture and the data.
The first major episode of TP expansion in this cycle took place between August 4, 2020, and March 19, 2021, from negative 139-basis points to positive 35-basis points, for 174-basis points of expansion in total.
The second TP expansion took place from July 19, 2023, through October 25th, 2023, starting at negative 94-basis points positive and ending at 44-basis points. 138-basis points in total were covered in this TP expansion.
The current episode began on September 11, 2024, and according to the most recent data, is still going as of January 2, 2025. Starting at negative 29-basis points, and currently sitting at positive 49-basis points, for a total of 77-basis points of expansion. The table below summarizes the data.
To the extent the above is of any use, it is simply to point out ranges in TP expansions in this cycle. Thus, this note will not put you, dear reader, through the technical analysis gymnastics of how many days these expansions lasted or their rates of change. That would be as useful as learning that it rained in London last year. What we want to explore are the causal factors, not the events themselves.
Specifically, we want to look at what markets were pricing at the time going forward.