Bonds And Premiums
Today we’ll turn our attention to the two risk premiums that help explain the performance of bond portfolios—term and credit. Unlike with the value premium, there’s no debate about whether these two factors earn premiums based on risk. They are not anomalies created by behavioral errors.
The data covers the same 87-year period, 1927-2013, that we used in looking at the equity premiums.
Term Premium
The term premium is defined as the difference in returns between long-term government bonds (20-year) and one-month Treasury bills. For the period 1927-2013, the average annual term premium was 2.36 percent. The annual standard deviation of that premium was 9.41 percent, or 4.0 times the size of the premium itself.
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