The US Treasury market has fallen into one of the most severe downturns this year, with yields soaring, signaling a continuous rise in risk.

An indicator from the Federal Reserve shows that the so-called term premium on the 10-year US Treasury, which was near zero, has risen to slightly below 25 basis points so far this month, reaching the highest level since November last year. The term premium on the 10-year US Treasury is the additional yield that investors holding government bonds instead of short-term securities demand, and is typically described as the additional yield that investors require for holding long-term bonds.

Although the indicator may sound academic, it is closely watched by market observers. It provides important information about investors' views on future risks - whether inflation, supply, or any other risks that exceed the expected path of short-term interest rates.

In a recent example, the surge in the term premium occurred as bond market sell-offs deepened, as traders believed that in the case of strong economic data, the Fed's rate cut path would be shallower.

Also playing a significant role in the past week is the intense US presidential election, as well as some investors increasingly feeling that the Republican Party has a chance to win both Congress and the White House simultaneously. It is believed that in the high US borrowing environment, besides the inflation pressure brought by the tariff system proposed by Trump, this result adds more possibilities for increased spending and tax cuts.

George Catrambone, head of DWS Americas Fixed Income Department, said: "Currently, various factors such as elections, fiscal policies, tariff risks, etc., are intertwined, leading to a higher term premium. The resilience of labor and consumers is driving inflation and economic growth higher than the Fed's long-term target."

According to the Fed's measurement standards, the term premium of the 10-year US Treasury bonds turned positive in October of last year for the first time since June 2021, reaching a peak slightly below 50 basis points as the deficit spending issue intensified.

The indicator fell to a low of -1.67% in 2020, partially due to a decrease in the inflation rate. In the years prior to this, the Fed's purchase of government bonds as part of its monetary policy largely restrained the decrease in the inflation rate.

Now, with the selling pressure in the entire bond market driving the Bloomberg US Treasury Bonds Index down by 2.1% in October, this indicator is on the rise. US Treasuries will see their first monthly decline since April, with the 10-year Treasury yield heading towards 4.25%.

Earlier this month, a strong September employment report surprised investors, triggering bearish sentiment. The Atlanta Fed's GDP forecast indicates an economic expansion rate of 3.4% for the third quarter.

Despite the 10-year US Treasury inflation expectations remaining stable and below 2.5%, the bond market is still awaiting the US Treasury's latest forecasts for debt sales in the next quarter. It will closely monitor the Treasury's signals on the long-term debt issuance trajectory.

Meanwhile, the imminent US election has sparked concerns over excessive debt and deficits in the long term. During the Trump administration, debt and deficits could pose an even greater threat.

BBH strategist Elias Haddad said: 'During Trump's presidency, the US fiscal outlook is expected to deteriorate, which will increase the compensation required for investors holding long-term government bonds, namely the term premium.'

Editor/Rocky