The yield curve is not broken. The underlying decomposition — yield equals expected average future short rate plus term premium — has not fractured. What has changed is which component is doing the talking.
From 2022 through 2024, the curve was inverted almost entirely because of Fed-cut expectations layered on top of a term premium the Fed itself had spent a decade suppressing through quantitative easing. That made the classic “inversion predicts recession” signal noisy. Right now, the curve is not inverted. The 10-year sits around 4.56%, the 2-year around 4.21%, and the 10s2s spread is positive. This is closer to a normal curve shape than the U.S. has had in years. The term premium — long dormant — has returned as the dominant driver of the long end, not Fed-rate expectations. The curve is behaving more like a textbook curve, not less.
The Term Premium Has Come Back
The ACM and Kim-Wright models both put the 10-year term premium between 0.47% and 0.73% as of mid-July 2026 — positive for the first time since 2023. Mechanically, term premium is just yield minus expected average future short rate. It is a residual, not a labeled quantity. Models can tell you it exists and its size, but not cleanly why.
What professional fixed-income desks are attributing the rise to is a bundle of overlapping uncertainties that are hard to separate:
Duration and rate-uncertainty risk. A new Fed chair with an explicitly different framework — Kevin Warsh dropped forward guidance, leans monetarist, and has signaled hawkish positioning — genuinely raises the variance of future rate paths.
Fiscal and supply risk. Net issuance stays elevated regardless of the bill-versus-coupon mix. Someone has to absorb a growing debt stock with a smaller price-insensitive buyer base. The Fed is no longer expanding, and foreign official demand is growing slower than the debt.
Inflation uncertainty. Inflation has stayed above target even as June CPI cooled, and geopolitical shocks — the Iran and Strait of Hormuz tensions in mid-July — add two-sided inflation risk.
Institutional and political risk. This is the genuinely novel factor. The Lisa Cook litigation and the contested Warsh confirmation — the narrowest in Fed history — put a non-zero premium on the possibility that Fed independence itself becomes less certain over the medium term. Markets do not have a clean model term for this, but it is consistent with why gold, a pure hedge with no Fed-policy channel, has also been hitting record highs above $5,000 per ounce at the same time bonds are cheapening. Two different markets are pricing overlapping but distinct concerns: currency and fiscal debasement risk versus bond-specific duration risk.
The term premium is not pricing “just” inflation or “just” fiscal risk. It is pricing a genuine increase in policy-regime uncertainty, of which fiscal sustainability is one strand among several.
Fiscal Dominance: The Concern, Not the Regime
Fiscal dominance is a live, well-founded concern. It is not yet the operative regime.
The risk case is serious and mainstream. At a January 2026 Brookings/ASSA panel, Janet Yellen, Loretta Mester, Athanasios Orphanides, and David Romer all warned that the preconditions for fiscal dominance are clearly strengthening. The arithmetic is not disputed: debt crossed $38.5 trillion in early 2026, the CBO projects debt held by the public near 100% of GDP rising toward 120% by 2036, and net interest costs are more than doubling from roughly $970 billion to about $2.1 trillion, from 3.2% to 4.6% of GDP.
But the “already governing policy” case is weaker right now — because the sitting Fed is doing the opposite of what fiscal dominance predicts. Warsh, sworn in May 22, 2026, has been explicit that he wants a smaller Fed footprint, not a larger accommodative one. At his first meeting he held rates at 3.50% to 3.75% but signaled hawkish positioning, with nine of eighteen FOMC participants projecting at least one hike in 2026. He is pushing to actively shrink the balance sheet rather than passively let it run off. We call this the “Warsh Doctrine” — an aggressive reduction of the Fed’s balance sheet, ending the era where the central bank acted as buyer of last resort for long-duration debt. That is the opposite of subordinating rates to Treasury’s financing needs.
Fiscal dominance is a structural risk that markets are pricing. It is not the current operating regime.
Yield Curve Control: What Is Actually Happening
Yield curve control is not underway in the literal sense — no announced yield target or cap — and the current Fed trajectory argues against it.
Quantitative tightening ended December 1, 2025. Since then the Fed has run narrow “Reserve Management Purchases” — buying Treasury bills to reinvest MBS paydowns and maintain ample reserves, not to support long yields. This is balance-sheet plumbing, not duration suppression, and it targets bills, not the long end. Warsh is pushing the opposite of yield curve control by actively trying to shrink the balance sheet further, which is why term premium has been rising rather than falling.
The piece that does resemble curve management — though it is a fiscal, not monetary, lever — is Treasury’s own issuance mix. Treasury has been leaning heavily on short bills, with 4-week bill issuance running around $101 billion per auction versus roughly $47 billion in 2016, while holding coupon auction sizes flat under a “regular and predictable” pledge. Some critics call this “backdoor” curve management — minimizing the government’s weighted borrowing cost by avoiding heavy long-duration supply. It is a legitimate debate, but it is Treasury debt management, not central-bank yield curve control. And the term-premium data argues it is not working as suppression even if that is the intent, since long yields have kept rising, not falling.
Duration Positioning
With the Fed stepping back as a duration buyer and term premium normalizing rather than compressing, unhedged long-end Treasury exposure carries more two-way risk than it did when the Fed was the marginal buyer. Duration is no longer free the way it was in the quantitative-easing years.
The operational implications are straightforward. Some investors are shifting duration exposure toward the belly of the curve — the 5- to 7-year segment — which is more anchored to the Fed’s actual policy path and less exposed to the term-premium and fiscal-supply story concentrated at the long end. Curve steepening exposure has been a working theme — bear steepening, with long yields rising faster than short — but it is a two-way bet, not a one-way trade, especially with the Fed itself now flagging possible hikes at the front end.
TIPS and breakevens help decompose the signal. If nominal yields keep rising while breakevens stay contained, that tells you it is real term premium — duration and fiscal risk — not inflation expectations. That matters for whether nominal long bonds or TIPS are the better hedge for a given portfolio.
Gold and real assets are already pricing a slice of the fiscal debasement story outside the bond market. Anyone using bonds as their only inflation or fiscal hedge should note that the two markets are not saying identical things.
A rising Treasury term premium does not automatically mean corporate credit spreads should widen in sympathy. Sovereign duration risk and credit risk are different factors.
What to Watch
Two concrete data points will tell you more than any macro narrative about whether this normalizes further or turns into something closer to genuine curve management.
Treasury’s next quarterly refunding announcement, scheduled for early August 2026, will show whether there is any shift in the bill-versus-coupon mix. Any signals from Warsh’s new balance-sheet and communications task forces about whether the Fed’s reduced footprint continues or reverses will tell you whether the central bank is doubling down on the Warsh Doctrine or pivoting back toward accommodation.
The yield curve is not broken. The decomposition holds. The term premium has returned, and it is pricing a genuine increase in policy-regime uncertainty. The question is not whether the framework works — it does. The question is what happens when the uncertainties it is pricing start resolving one way or the other.