Treasury Term Premium Drives 30bp July Yield Jump

Term premium, not policy-rate expectations, now drives the long end of the US Treasury curve.

The 10-year Treasury yield climbed about 30 basis points in July, almost entirely from a rising term premium, as fiscal deficits, foreign selling and an AI-driven corporate bond wave reshaped how the market prices long-dated US debt.

"The pricing framework is shifting from a single policy-rate expectation toward a multi-dimensional system driven by fiscal risk premium, supply-demand imbalance and long-run inflation risk," according to macro research from Chuan Yue Global Macro.

The move marks a break from the first half, when the 10-year rose 23 basis points with expected short-term real rates contributing about 15 basis points, or roughly 65 percent of the gain. The yield reached 4.7 percent after the July Federal Open Market Committee meeting, even as short-end expectations faded on softer data and Fed hesitation.

The bear steepening carries direct consequences for global asset prices: a higher term premium lifts the discount rate applied to equities, raises borrowing costs across the economy and pressures emerging-market assets. With the 10-year already at 4.7 percent, the question is how much further the long end can run before demand returns.

Fiscal Deficits Lift the Supply of Long-Dated Debt

The fiscal backdrop is the largest single driver. The Treasury must refund about $166 billion in tariffs collected under the International Emergency Economic Powers Act after courts ruled them unlawful; $81 billion has been returned, mostly in May and June, with nearly half still pending. The refunds are expected to lift the deficit ratio by about 0.6 percentage points. New tariff revenue for fiscal 2026 is projected at roughly $80 billion, less than half of the $190 billion collected in fiscal 2025, pushing the deficit ratio 0.3 to 0.4 percentage points above last year's 5.8 percent.

Replacement provisions under Sections 301 and 338 of the Trade Act cover less than 60 percent of the revenue lost from reciprocal tariffs. The Committee for a Responsible Federal Budget estimates the IEEPA ruling will cost about $1.7 trillion in tax revenue through fiscal 2036, while the new rules add only about $950 billion. That structural gap forces the Treasury to keep issuing long-dated debt, and defense spending adds pressure: the fiscal 2026 defense budget of $876.8 billion was nearly 80 percent spent by June, with about $678.7 billion drawn down.

Foreign Selling and AI Capex Squeeze the Buyer Base

On the demand side, the marginal buyer is retreating. Japan, the largest foreign holder, net sold about $80 billion of US Treasuries from January through May, and Warsh's balance-sheet discipline points to a Fed less willing to act as a backstop for long-end supply. Meanwhile, the top five cloud vendors — Microsoft, Alphabet, Meta, Amazon and Oracle — spent about $180 billion on capital expenditures in the second quarter, up roughly 90 percent year over year, and carry about $700 billion in long-term debt, nearly double the level at the start of 2025. That wave of high-grade corporate issuance competes directly with Treasuries for the same institutional money, forcing the long end to offer a higher premium to clear.

The path ahead hinges on four variables: whether economic data slow enough to pull down short-rate expectations, whether new tariff measures offset the refund-driven revenue gap, whether Japan slows its Treasury sales as yen pressure eases, and whether Warsh's reform working group on communication, the balance sheet and the inflation framework restores credibility. If fiscal and supply pressures persist, the bear steepening that defined July is likely to extend through the second half, keeping long-end yields elevated even as the Fed hesitates on further hikes.

This article is for informational purposes only and does not constitute investment advice.