Supply fears are already in the long end

Heavy government issuance is the reason most often given for high long-dated yields, and it is a good reason. By now, though, the market has priced a great deal of it into term premium, which changes the balance between what can go wrong and what is already assumed.

Priced fear

Term premium is the extra yield investors demand for holding long bonds instead of rolling short ones. It rises when supply is heavy and when the path of rates is uncertain. Once it has risen a long way, more of the same news has less effect, because it is expected.

That is the moment when the long end can do well even without good news, simply because the bad news stopped being new.

What I'm watching

• Term premium estimates at ten years
• Auction results, particularly how much dealers are left holding
• Changes to the issuance plan, which move expectations directly

Where I stand

Long, on a long end where supply fears are largely priced. The risk remains; the reward for bearing it has improved.

What would change my mind

A larger increase in issuance than the market expects. Priced fear only protects against the expected amount, and a surprise would reset it higher.