The so-called term premium is back, bigger and badder, driving bond yields higher.

A television station broadcasts Jerome Powell, chairman of the Federal Reserve, on the floor of the New York Stock Exchange on Dec. 18.

The phrase refers to the portion of the 10-year Treasury yield that reflects investors’ compensation for the risk involved in locking their money away for a decade, rather than just repeatedly reinvesting cash into short-term securities, such as one-month bills, for 10 years. Extra compensation makes sense because there is more chance for interest rates, or other important variables, to change over longer periods.

The 10-year term premium is in the spotlight because together with expectations for future short-term interest rates, it accounts for the level of 10-year yields, which have taken off. Currently, the 10-year yield stands at 4.787%, just shy of 4.802%, the highest yield in a year, which was also the peak since October 2023.

Higher yields spell opportunity for investors waiting on the sidelines for better rates—whether the yields are sufficiently attractive for them to jump in is another topic—but they are a menace for stocks, existing bondholders, and economic growth.

A rise in 10-year yields raises borrowing costs both for consumers, including via mortgage and credit-card rates, and for corporate borrowers. And that combination—less spending power for the public and higher costs for companies—can hit stocks. It also lowers the prices of bonds already held by investors, which in turn lowers their total returns.

The term premium appears responsible for the current surge in yields. On Thursday and Friday, the variable was at 63 and 65 basis points, respectively, its highest levels since Sept. 24, 2014, based on a model used by the New York Federal Reserve. On Monday, it climbed to 66 basis points, or hundreths of a percentage point, its highest since Sept. 18 that year.

The 10-year term premium has risen a total of 85 basis points since the Fed unveiled the first of last year’s three cuts to benchmark rates on Sept. 18. The rise in the term premium coincides with the 111.7 basis-point increase in the 10-year yield over the same time.

At a virtual event last week, Thomas Barking, president of the Federal Reserve Bank of Richmond, cited the term premium as a reason for the rise in long-term interest rates, as opposed to concern that inflation will take off again.

Wall Street is taking note and is factoring it into its forecasts. “We raise our interest rate forecast on the back of our revised Fed call and higher term premium: we now see 10-year yields at 4.55% at YE,” wrote Jay Barry, head of global rates strategy at J.P. Morgan, on Friday. His prior forecast was for the 10-year yield to end 2025 at 4.25%.

On Monday, Deutsche Bank said it sees a risk that the term premium will rise, “which could keep the 10-year Treasury yield at 4.75% or higher in 1H25.”

When the term premium last grabbed Wall Street’s attention around October 2023, it had just turned positive for the first time in more than two years. In a speech at the time, Dallas Fed President Lorie Logan said term premiums could be responsible for more than half of the total increase in long-dated yields since a Fed meeting that July.

The difference between then and now isn’t only that term premiums are much higher today: The peak in October 2023 was 47.24 basis points, as opposed to 66 basis points now. What is significant is that uncertainty about the outlook for fiscal policy under the coming Trump administration is sending premiums higher.

Bond investors are concerned that Trump’s plans for tax cuts could mean the government would need to issue more debt to make up for a larger shortfall between spending and revenue. Increased bond supply always worries investors.

“It’s unclear how well markets can absorb record U.S. Treasury issuance that has helped drive term premium to its highest level in a decade,” Wei Li, global chief investment strategist at BlackRock, said on Monday in the firm’sweekly market commentary. BlackRock is underweight long-term Treasuries.

To be sure, the 2023 rise in term premiums was also due to an imbalance in supply and demand for debt. Back then, auctions of 30-, 10-year, and three-year Treasuries had gone badly, signaling the government was offering more debt for sale than investors wanted to buy. But this time, auctions are going fine.

The real factor is uncertainty about how Trump’s initial moves as he resumes the presidency on Jan. 20. will affect yields. “Fiscal fears are a bigger part of the story,” Andrew Sheets, chief cross-asset strategist for  Morgan Stanley, wrote on Tuesday.