Treasury demand becomes more valuation-sensitive as term premiums near decade highs

The new marginal buyer of Treasuries is someone who actually looks at the price tag. Households and mutual funds now account for the bulk of net new Treasury absorption, with households alone taking down over half of recent net increases. These buyers, unlike the Fed or the People’s Bank of China, will demand more yield when conditions look risky and pull back when valuations don’t make sense.

The term premium is back, and it’s not subtle

The 10-year Treasury term premium now sits between 0.8% and 1.37%, depending on the model used. Either way, that’s the highest sustained level in nearly a decade. In practical terms, it means the market is telling Washington that borrowing long costs more now, not because of inflation expectations alone, but because investors simply aren’t sure what comes next and want to be compensated for that uncertainty.

The US government is projected to issue roughly $2 trillion in net new Treasuries annually over the next decade. When the Fed was expanding its balance sheet, absorbing a big chunk of that supply was essentially automatic. Now, the private sector has to do the heavy lifting, and private investors are pickier customers.

Volatility is the new normal

That dynamic played out visibly in April 2025, when tariff-related volatility rippled through fixed income markets. Yield-to-OIS spreads widened, a technical but important signal that the plumbing of the Treasury market was under stress. Some auctions came in notably weak, with dealers forced to absorb more inventory than usual.

The good news is that overall demand for Treasuries remains robust. The US government is not having trouble selling its debt. But the terms of that sale are shifting. Buyers want more yield, they want it consistently, and they’re willing to push back when supply overwhelms their appetite.

What this means for rates and beyond

When term premiums are elevated, companies pay more to issue debt, homebuyers face higher mortgage rates, and the discounted cash flow models that underpin stock valuations become less generous.

The more immediate risk is a feedback loop. Higher term premiums increase the government’s interest expense, which widens the deficit, which requires more issuance, which pushes term premiums higher still. Treasury officials have already been skewing issuance toward shorter maturities to avoid paying up at the long end, but that’s a temporary fix that introduces its own refinancing risks.

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