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The U.S. Treasury 10-year term premium, a gauge of investor compensation for holding long-term government debt securities, has shifted into positive territory this week. This move comes as the U.S. economy shows resilience, defying expectations of aggressive interest rate cuts, while election uncertainty impacts long-term bonds.

Term premiums have been subdued for around a decade due to low Interest rates following the global financial crisis and the COVID-19 pandemic. However, they have started to rise in recent years amid concerns about long-term fiscal issues and expectations of persistent Inflation.

According to data from the Federal Reserve Bank of New York, the 10-year term premium turned positive on Monday for the first time since July 25, standing at 0.034%. This shift follows a surge in Treasury yields triggered by strong U.S. jobs data last week, leading investors to adjust their expectations for future interest rate cuts by the Federal Reserve.

Co-chief investment strategist at John Hancock Investment Management, Matthew Miskin, suggests that the rise in term premiums may indicate market expectations of higher government deficits under a potential Donald Trump presidency. This speculation comes as Trump and Vice President Kamala Harris vie for the presidency, with a recent poll showing a narrow lead for Harris.

PIMCO, a prominent bond asset manager, had earlier anticipated an increase in term premiums due to persistent Inflation and growing fiscal deficits. The company mentioned that widening U.S. deficits and inflationary trade policies post-election could weigh on long-term Treasuries, despite the near-term possibility of lower rates.

Expectations for Inflation over the next decade, measured by the disparity between 10-year nominal Treasury yields and yields on 10-year Inflation-protected Treasuries, reached 2.284% this week, the highest level since July 22.

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