Term premia have had a wild ride in 2021 as measured by the NY Fed ACM model. The 10-year premium priced in a negative value even for long rates earlier in the year only to see a huge reversal in February and then a decline starting in late May. The premium hit a low surrounding the June FOMC only to bounce back in the last week. The key question is whether the premia should move higher or stay at the current levels. Term premia are not the real yield or expected inflation but the risk of holding a longer-dated bond versus a set of Treasury bill short rates.
Higher uncertainty about policy, growth, and inflation will all be embedded in the risk premia. Given the changing expectations on the components of yields, it is likely that the premium will increase regardless of real yields and expected inflation. This should lead to higher yields even if expectations and policy remain stable.
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