Despite a notable drop in yields on U.S. Treasury bonds since Donald Trump assumed office, a crucial measure of market risk—the term premium—has remained above zero, revealing persistent investor anxiety.

The term premium, which represents the extra return investors demand for holding long-term government debt amid uncertainty, has stayed positive even as the yield on the 10-year Treasury has slid by around 50 basis points since Trump’s inauguration. This premium reflects concerns not only about future monetary policy but also the perceived stability and creditworthiness of the U.S. government.

According to data from the New York Federal Reserve, the term premium began turning positive in late 2023—coinciding with Trump’s rising political momentum—after remaining negative for years. Analysts interpret this as a sign that market participants are increasingly factoring in political and institutional uncertainty.

As Trump shakes up traditional U.S. policies—pursuing aggressive trade measures, clashing with institutional norms, and raising questions about the federal government’s structure—concerns about America’s long-term fiscal reliability are growing. Several market strategists believe that the term premium is now a reflection of these broader risks.

“There’s growing concern about how the government functions, the strength of the legal system, and the predictability of U.S. policy,” said Ronald Temple, chief market strategist at Lazard.

While the Trump administration maintains its agenda will boost growth and restore America’s economic strength—with tax cuts and reduced government spending—market reactions paint a more complex picture. Proponents point to falling yields as a vote of confidence, but others argue the decline is due to weakening economic indicators, which are dragging down interest rate expectations.

Some investors believe that if the current trend continues, “bond vigilantes”—those who push back against risky fiscal policies by selling government debt—could return to the scene, increasing borrowing costs for the U.S. government.

“Over time, these developments could raise the U.S. cost of capital and diminish its investment appeal,” Temple added.

While the term premium is influenced by a mix of factors—ranging from the appeal of bonds over stocks to expectations about fiscal deficits—it also captures shifting geopolitical and institutional perceptions, says Benson Durham of Piper Sandler.

Last week’s market turbulence saw Treasury yields tumble, but the term premium declined far less, underlining its stubborn persistence. When yields fell 14 basis points on Thursday, the premium only dipped by two.

Emanuel Moench, one of the creators of the New York Fed's model, said the premium acts as a “statistical gauge of Treasury market risk.” While it reflects policy turbulence, it doesn’t isolate which specific factors are to blame. Still, he noted, “If Treasuries start losing their safe-haven reputation, we should expect upward pressure on the term premium.”
Policy Instability Fuels Investor Worries

Multiple investors and strategists have flagged the Trump administration’s wide-reaching policies—from governance reforms to foreign affairs—as catalysts for rising unease. Trump’s push for deep government cuts, coupled with steep tariffs on key allies, has weakened business sentiment and stirred recession fears.

His willingness to test the boundaries of presidential power, along with a massive debt-fueled tax agenda, has further amplified worries about the sustainability of U.S. finances. The national debt currently sits at a staggering $36 trillion.

International sentiment is also shifting. Several foreign bankers and officials have noted a quiet search for alternatives to the U.S. dollar and American assets, especially among countries like Japan, South Korea, Germany, and Taiwan. Although the U.S. remains unrivaled in economic scale and financial market depth, that could change over time.

Matt Smith, fund manager at Ruffer, a U.K.-based investment firm, noted: “Countries that hold vast amounts of U.S. assets and have historically relied on U.S. security guarantees may rethink that exposure, particularly if political volatility persists.”

Ruffer, which manages $24 billion, has significantly reduced its exposure to U.S. risk assets and the dollar, citing high valuations and the potential for geopolitical shifts.
Concerns Over Rule of Law and Institutional Integrity

A growing number of analysts warn that Trump's confrontations with the judiciary and government agencies are damaging the perception of U.S. institutional stability—long seen as a bedrock of global investor trust.

One source at a major credit ratings agency revealed that they are carefully monitoring actions that could weaken the rule of law—a critical metric in sovereign credit evaluations.
“There’s a real sense that institutional strength is being undermined,” said David Page, head of macro research at AXA Investment Management. “If that erosion continues, it could ultimately affect how global investors allocate capital, impacting both the dollar and U.S. financial assets.”

Mehill Marku, geopolitical analyst at PGIM Fixed Income, pointed to Trump’s embrace of the "unitary executive" theory—which asserts broad presidential power—as another area investors are watching closely.

“That concentration of authority in the executive branch raises serious flags for markets,” he said.

Jeffrey Sherman, deputy CIO at DoubleLine Capital, emphasized that policy unpredictability can gradually erode investor trust. “You build goodwill over years, but it only takes one misstep to unravel it,” he warned. “Eventually, if trust falters, people just stop doing business with you.”