U.S. Treasury yields are carrying a far larger premium over the Federal Reserve’s policy rate than they did less than two years ago, with the extra compensation concentrated at longer maturities and Treasury bonds showing less ability to cushion equity selloffs. On July 27, the 10-year Treasury yield closed at 4.65%, 102 basis points above the 3.63% effective federal funds rate, according to Federal Reserve data.
The entire Treasury curve traded above the policy rate that day. One-month bills yielded 17 basis points more than the effective federal funds rate, while the one-year and two-year yields stood 51 and 68 basis points higher, respectively. The premium rose to 152 basis points at 20 years before easing slightly to 149 basis points at 30 years.
That pattern places the largest repricing in the part of the curve most exposed to inflation uncertainty, debt issuance and the risk that traders demand more compensation to lock money into long-dated government securities. Yields rose only 9 basis points between the two-year and five-year maturities, then increased 25 basis points from five to 10 years and another 50 basis points from 10 to 20 years.
Long maturities are absorbing the heaviest premium
The spread between the 20-year and two-year yield, a simple proxy for duration compensation, stood at 84 basis points. That remained below the 124-basis-point peak reached during the 1994 bond-market rout, but it has emerged against a substantially larger federal debt burden. U.S. federal debt was about 120% of gross domestic product, compared with roughly 64% in 1993, according to the figures cited in the analysis.
The current 10-year spread over the policy rate is also smaller than the extremes of the early 1990s: 219 basis points in October 1993 and 330 basis points in November 1994. Yet the structure of the curve resembles that period more closely than easing-driven steepenings in 2003, 2010 or 2013. In those episodes, short-term yields sat below policy rates as markets anticipated lower central-bank rates. In July, even the one-month bill traded above the effective federal funds rate.
That short-end pricing suggests markets were not simply discounting rapid rate cuts. The supplied analysis links the expectation of persistently restrictive conditions to the 2026 Middle East energy shock, which has added to uncertainty over inflation and the Fed’s room to ease.
The move has been fast. In September 2024, Treasury yields across the curve were between 132 and 192 basis points below the policy rate. By late July 2026, maturities ranged from 33 to 152 basis points above it, an upward shift of roughly 240 to 290 basis points over 26 months.
Fed models place the pressure in term premium
Federal Reserve term-premium estimates support the view that the long end is doing much of the work. The New York Fed’s Adrian-Crump-Moench, or ACM, model estimated the 10-year term premium at 0.72 percentage points. The San Francisco Fed’s Christensen-Rudebusch model put it higher, at 1.25 percentage points, while estimating the two-year term premium at 0.21 percentage points.
A term premium is the additional yield traders require for bearing the uncertainty of holding a longer-dated bond rather than repeatedly rolling over short-term debt. The San Francisco Fed model estimated that the expected average overnight rate during the next decade was 3.47%, below the current 3.63% effective federal funds rate. Its decomposition therefore leaves about 1.25 percentage points of the 10-year yield attributable to term premium rather than expected short rates.
Cross-country comparisons place the United States in the middle of the major-economy range rather than at an extreme. The U.S. 10-year-minus-policy-rate spread was 102 basis points, compared with 88 basis points in Germany, 125 basis points in the United Kingdom, 167 basis points in France, 169 basis points in Italy and 178 basis points in Japan.
At two years, the United States traded closer to France, Italy and India: the U.S. spread was 68 basis points, against 71 basis points in France, 74 in Italy and 72 in India. At 30 years, the U.S. premium of 149 basis points remained below Japan’s 288 basis points, Italy’s 250 basis points and France’s 244 basis points.
Scaling the 10-year spread by debt-to-GDP produces a less flattering comparison for Washington. The supplied calculation puts the U.S. ratio at 0.85, second-lowest in the group behind Japan’s 0.77. A move toward the approximate G10 median ratio of 1.25 would imply a 10-year spread around 150 to 170 basis points, or roughly 50 basis points more than the July level.
Treasury bonds failed to offset Asia equity losses
The implications became visible during the late-July selloff in Asian technology shares. On July 28, the 10-year Treasury yield remained in a 4.6% to 4.7% range even as equity markets fell sharply, denying multi-asset portfolios the usual rally in government bonds during a risk-off session.
South Korea was at the center of the decline. The KOSPI fell 12.84% on July 28 to close at 6,023.66, more than one-third below its late-June peak near 9,400. The drop triggered the year’s eighth market-wide circuit breaker, according to the figures provided. Samsung Electronics fell 13.39% and SK Hynix lost 14.65%.
The selloff followed a surge in leveraged exposure to Korean AI-hardware leaders. Sixteen single-stock 2x leveraged exchange-traded funds approved on May 27 attracted nearly 12 trillion won in roughly 50 days, with more than 90% directed toward Samsung and SK Hynix, according to the supplied data. More than 1.2 million leveraged accounts received margin calls, and several hundred thousand faced forced liquidations.
Treasuries’ muted reaction meant the equity decline was not accompanied by the standard decline in benchmark yields that can soften losses in balanced portfolios. Nasdaq futures fell 2.29% in the same episode while Dow futures rose 1.12%, reflecting a sharp split between chip exposure and companies with nearer-term cash flows.
The dollar also failed to provide a conventional stress signal, with the dollar index closing near 101.6 on July 28, in the lower half of its multiyear range. The Institute of International Finance reported non-resident portfolio outflows of $26.6 billion in May and $17.8 billion in June, following a record $98.8 billion inflow in January.
Higher funding costs reshape leverage calculations
The current cash-rate environment creates a much tougher hurdle for leverage-dependent strategies. With the effective federal funds rate at 3.63% and short-term Treasury yields between 3.8% and 4.0%, cash can generate returns that in earlier periods required considerably more risk. Repo financing, swap funding and stock-borrow costs add to that burden for strategies built around borrowed capital.
Options markets are presenting a mixed picture. The supplied analysis found that rate options, the Cboe SKEW Index and gold implied volatility continued to reflect concern about tail events, while 25-delta equity skew and Bitcoin volatility pointed to a calmer central scenario. Gold implied volatility remained around 21 to 22 after a 27% pullback, with call skew intact.
The emerging Treasury repricing therefore reaches beyond one bond-market metric. It raises discount rates for long-duration equities, increases the cost of financing large corporate projects and weakens the assumption that government bonds will reliably rise when risk assets fall. The next tests are likely to come through 20-year Treasury auction demand, the Fed’s term-premium estimates, monthly international portfolio-flow data and whether yields continue to hold firm during future equity declines.
As bond term premia rise, understand how fiscal policy shapes yields, risk premia, and cross‑asset opportunities.
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