Government bond yields have risen sharply this year, driven by a combination of inflationary pressures linked to the conflict in Iran and optimistic growth expectations associated with investments in artificial intelligence infrastructure. However, financial analysts are now pointing to a less talked-about factor contributing to the increase: the rising “term premium.”

The term premium represents the additional compensation investors require for the risk of holding long-term government debt. According to estimates favored by the U.S. Federal Reserve, the term premium on the 10-year Treasury note recently reached 0.9%, its highest level in more than a decade. The broader 10-year yield currently stands at 5.24%, indicating that concerns over risk are playing an increasingly significant role in driving yields upward.

Traditionally, government bond yields are influenced by three main factors: expectations about Federal Reserve interest rate policy, inflation forecasts, and the term premium—essentially an extra return demanded for bearing risks such as potential shifts in market conditions, government fiscal health, and liquidity concerns. As the term premium rises, it signals that investors view lending to the government as riskier or less attractive, pushing yields higher even if inflation and economic growth outlooks remain steady.

The recent spike in term premium reflects growing global unease over mounting government debts and fiscal imbalances. In Europe, fiscal strains have intensified, with France’s 10-year government bond yield climbing approximately one percentage point to 4.85% over the past three months amid concerns about the country’s budgetary challenges. The United Kingdom has seen a rise of roughly half a percentage point, with its 10-year yield reaching 5.4% during the same period.

In the United States, domestic and foreign investor sentiment has shifted as well. Foreign central banks have reduced their holdings of U.S. Treasuries over recent years, contributing to upward pressure on yields. More recently, increased competition for capital—particularly from large technology firms borrowing heavily—has further driven yields up.

The implications of rising yields vary depending on the underlying causes. When higher yields stem from expectations of stronger economic growth, companies may benefit through increased profits, potentially offsetting the negative effects of higher borrowing costs. Similarly, governments may see rising tax revenues that balance out the increased interest expenses on debt.

However, when the increase is driven primarily by a higher term premium—meaning investors are demanding greater compensation for perceived risks—it can raise the government’s borrowing costs without an accompanying economic boost. Analysts from Barclays highlighted that such a rise in term premium “increases the government’s financing cost without automatically improving the revenue base or the economy’s capacity to service the debt,” posing a more challenging outlook for fiscal sustainability.