ACM Term Premium Model

What Is the ACM Term Premium?

The ACM Term Premium Model is a five-factor affine no-arbitrage term structure model published by the Federal Reserve Bank of New York. It decomposes US Treasury yields into two unobservable components: the average expected short rate over the bond's maturity, and a term premium that captures everything else (compensation for inflation uncertainty, supply-demand imbalances, and policy-path risk).

The model is named for its authors Tobias Adrian, Richard Crump, and Emanuel Moench (2013). The NY Fed publishes daily estimates for 1-year, 2-year, 3-year, 5-year, 7-year, and 10-year term premiums on its website. The 10-year ACM term premium is the most-watched series.

Why It Matters for Markets

Term premium is the second-largest single driver of long-bond yields after rate expectations. When term premium expands, the long end of the curve rises independently of what the Fed signals about future rates. This is the textbook bear-steepener mechanism that crushed TLT in 2022-2023.

The ACM decomposition lets traders distinguish two different types of yield moves: those driven by changing rate expectations (cyclical, monetary-policy-sensitive) versus those driven by changing term premium (structural, supply-demand-driven). A 100 bp 10-year yield rise that is entirely rate-expectations driven implies the Fed will move differently; a 100 bp rise that is entirely term-premium driven implies fiscal or risk-aversion shifts rather than policy.

How to Read the Print

ACM term premium level. Positive readings indicate compensation for duration risk above expected rates. The post-1960 average is roughly +100 bp. Readings near zero or negative signal that QE or other distortions have suppressed term premiums below the natural level.

Term premium versus breakeven inflation. When term premium rises alongside rising breakeven inflation, the move is inflation-uncertainty-driven. When term premium rises with stable breakevens, the move is supply-driven (Treasury issuance, foreign demand reduction).

Decomposition of yield moves. The cleanest analysis on any major yield move: was it rate expectations or term premium? The two have different policy implications and different durations.

Historical Context

ACM 10-year term premium averaged approximately +160 bp from 1961-2005. The post-2008 QE era pushed it as low as -90 bp in 2020 as the Fed's bond purchases compressed compensation for duration risk. The 2022-2024 cycle saw term premium swing from near zero in early 2022 to approximately +70 bp by October 2023, contributing roughly half of the long-bond sell-off in that window.

Through 2024-2025, ACM 10-year term premium has run in the +30 to +70 bp range, well above 2014-2021 levels but below the long-run norm. A sustained move above +100 bp would signal the structural normalisation continuing; a return toward zero would suggest term premium is being compressed by new dynamics (Fed cuts, foreign demand, or risk-off flight-to-quality).