ACM Term Premium Model

The ACM model (Adrian, Crump, and Moench, 2013) is the most widely referenced term premium estimate, published by the Federal Reserve Bank of New York. It decomposes each Treasury yield into two components:

1. Expected short-rate path: the average of expected future short-term rates over the bond's maturity
2. Term premium: everything else — the compensation for bearing interest rate risk, inflation uncertainty, and supply/demand imbalances

The model belongs to the class of no-arbitrage affine term structure models. It uses five pricing factors extracted from Treasury yields via principal components and estimates the market price of risk using excess bond return regressions.

The ACM term premium is available on this site's term premia tool, which visualizes both the time series of term premium estimates by maturity and the decomposition of any yield into its expectations and premium components.

Key insights from the ACM model:

• Term premium was deeply negative during QE periods (2012-2016) as the Fed's purchases compressed the compensation for holding duration risk
• Term premium surged positive during the 2013 taper tantrum and again in late 2023
• A rising 10-year yield can be driven by either component — higher rate expectations or higher term premium — with very different policy implications

The model has limitations: it is estimated in-sample, estimates are sensitive to the sample period, and it cannot distinguish between true expectations and risk-neutral expectations. Competing models (Kim-Wright, Christensen-Rudebusch) produce different point estimates but generally agree on the direction of changes.