10-8-26 Is the Term Premium Misleading the Fed?

Household spending support looks increasingly constrained: consumer credit has accelerated and people across income brackets are drawing from investment accounts, while the savings rate is near a 50-year low. Michael also says sentiment measures are deeply depressed but have little correlation with spending, and notes that PCE is running above what his 19-point consumer health index indicates.

The speakers disagree on the term premium—Lance estimates about 1%, while Michael puts it near 70 basis points—and Michael cautions that it is an uncertain measure with no single correct calculation. He argues that using it to guide Fed policy could lead to a mistake, and says yields could fall further if the Iran war ends and oil-related inflation expectations decline by about 50 basis points.

Lance frames Treasury yields as an opportunity-cost comparison: a 10-year yield of 5.2% looks less attractive against an assumed 10%–15% stock return, but he estimates that at 40 times earnings, historical decade-ahead equity returns would range from -2% to +2%, with 3% inflation. He says the Treasury yield in that example comes close to covering opportunity and inflation costs, consistent with his view that bond pricing depends on repayment risk and whether interest income outpaces inflation and growth.