The single best indicator of the direction of the macroeconomy — and, by extension, financial markets — is the term premium.
Some of us have been waiting for the other shoe to drop in financial markets since at least 2022. And yet they keep going higher, while bond prices tick lower. Will 2025 be the year there is a correction — or do high asset prices reflect a growing real economy that is on the verge of a major productivity boom because of AI, corporate tax cuts and a wave of deregulation?
No one knows for sure. But I will be looking at a few indicators in 2025 to tell me where financial markets are going. Most of them relate to the bond market, because it is both a window into the overall economy and an important component of how stocks and other risky assets are valued. Data for equities, commodities and currencies can be noisy. Bonds can give a sense of where everything is headed, including government policy.
The term premium. In my opinion, this is the single best gauge of the direction of the macroeconomy (and, by extension, financial markets): the difference between the yield on long- and short-term bonds. Unlike shorter-term bonds, which are highly influenced by monetary policy, longer-term bonds reflect the economic outlook. What happens to the term premium next year will be a good sign of whether markets are buying President Donald Trump’s growth agenda, or see it being stymied by the threat of tariffs, debt and high inflation. If the term premium increases, the 10-year rate will stay high — and higher for longer really means higher forever, which may cause some problems.
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Allison Schrager is a senior fellow at the Manhattan Institute and a contributing editor of City Journal.
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