As many have documented, the main channel of transmission for the Fed’s quantitative easing policy was via the term premium component of US treasuries. As the Fed’s balance sheet doubled from 2010 to 2015, the term premium embedded in US treasuries fell from 2.5% to -75bps. The Fed is now shrinking its balance sheet, which on the surface would seem to suggest a rising term premium.

It wasn’t just Fed led quantitative easing, but the ECB’s asset purchase policies have also imparted a negative impact on US term premiums. The acceleration in the ECB’s QE program in 2016 helps explain why the term premium didn’t bottom until mid-2016. As the ECB’s asset purchases are scheduled to end in December 2018, it would suggest the ECB will be adding to upward pressure on the term premium.