Bank of America said in a report that rising term premiums have driven long- and medium-term bond yields higher across developed markets since mid-September.
Rate strategist Ralf Preusser wrote in the report on Wednesday that "rather than blaming bond vigilantes, fiscal deficits, Japan, fiscal dominance, or eroding central bank independence, the driver of rising rates is central banks delivering rate hikes."
Previously, it was mainly rate hike expectations that pushed yields higher. Since around mid-September, the rise in medium- and long-term bond yields has been driven primarily by term premiums.
The term premium is the extra yield investors demand to hold long-term bonds. Since the central bank meetings in September, moves in 10-year and 30-year U.S. Treasury yields can be almost entirely explained by term premiums; changes in 10-year yields in the U.K., Japan, Australia, and Canada can also be fully explained by term premiums.
Preusser also said that, due to changes in the supply-demand dynamics at the long end of the U.K. rates market, the rebound in term premiums on long-dated U.K. government bonds has been especially pronounced this year.
He said this term premium trend has led the market to focus more on the November refunding announcement and on whether the European Central Bank will cool rate hike expectations.
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