|# Block 020 — ACM/KW term premium in practice

**Status:** ✓ done — closed 2026-07-17 Session 26
**Phase:** Phase 1 (Rates)
**Last updated:** 2026-07-19 (Session 27 — 5y5y direction-of-trade framing corrected, second-pass refactor)

## Topic scope

Live divergence patterns between ACM and Kim-Wright. Historical divergence. What the spread tells you. Fed staff papers. Practical use in trade construction.

## Plan

**Prerequisite:** Block 00a (rubric). ACM/KW term-premium trade construction.

**Pre-read (assigned 2026-07-15, Session 25 close — Block 017 close):**

- **ACM term-premium series page (NY Fed)** — read the methodology page, the latest release notes, and the historical chart commentary (~15 min, [thematic])
- **Kim-Wright term-premium paper** — abstract + Section 2 on the 3-component decomposition (~15 min, [thematic]) — KW 2005 ("An Arbitrage-Free Three-Factor Term Structure Model") or KW 2017 update on the Fed staff site
- **BIS Bulletin 2022 "Steepeners, flatteners and the term premium"** — re-read with Block 017 substrate loaded (~10 min, [thematic])

**Skip:**

- Full KW econometric derivation (use the model as a black box, focus on the output)
- ACM vs KW model comparison deep-dive (covered in Block 020 main material)
- Forward rate agreement (FRA) mechanics (Phase 2 territory)
- Detailed breakeven decomposition at the cohort-by-coupon level (Block 011 / Block 013 territory)

**Total: ~40 min, [thematic].**

**Status:** ○ queued — opens next session. Pre-read compliance check at session open per macro-mentor skill session-open-pre-read-verification protocol. Cold-recall re-confirmation pass at session open for the 4 NEW Block 017 items (curve regime classification, regime driver decomposition, yield-direction precision, FRED breakeven series) — all at Working+, re-verify after 1-2 days of Anki retention. Pre-block probes on the 4 standard vocabulary items for term-premium decomposition: ACM model + KW model + 3-component decomposition (expected short rate + term premium + residual) + real-yield vs nominal decomposition. Main material lands the *practical* use of term-premium decomposition in trade construction — load-bearing insight from Block 017 (a 2s10s move has two components: expectations + term premium; a regime trade should express a view on one component specifically, not on the headline spread). Live-data exercise at block close: pull current ACM term premium + KW term premium, compare divergence, classify the current term-premium regime (compressed / normal / elevated), and articulate a term-premium-driven trade construction. Block 020 is the bridge from Block 017's regime classification to Block 021's historical case studies (where the term-premium decomposition gets applied to specific historical episodes for trade-walk practice).

## Carry-forward to next block

**Session 26 (2026-07-17) close summary:**

- 14 atomic Anki cards pushed via AnkiConnect + synced + verified (note IDs 1784289831942–1784289832138). Topics: TP definition (forward + reverse), ACM-KW methodological difference + wedge diagnostic, 5y5y forward + decomposition + market-Fed LR wedge, TP-can-be-negative, ACM dataset column identification, Block 016/020 cross-block tie-in.
- Live-data verification: pulled real ACM daily series from NY Fed Excel; surfaced framing error from Block 017 close (TP at 68bp / 76th percentile, NOT +90bp; TP moved -11bp YTD, NOT +60bp). Trade thesis invalidated and replaced with cleaner one: long 10y / short 5y5y on 85bp market-Fed LR wedge compression.
- Pre-read compliance gate dropped per user direction — going forward, pre-reads accepted on user word.
- Substrate weakness on current-state TP interpretation (elevated vs extreme for trade construction) flagged for Block 021 worked example using 2018-2019 QT-era TP dynamics.
- Pre-reads assigned for Block 021: 2018-2019 QT-era TP dynamics (Liberty Street / Vissing-Jensen), March 2020 cross-asset blowout (NY Fed statement / Duffie BPEA), ACM/KW TP series historical chart orientation.

**Process changes filed:**
- 2026-07-17 — Pre-read compliance check dropped per user direction
- 2026-07-17 — Mentor's framing-data discipline: live-data probes must verify framing numbers BEFORE building trade theses
- 2026-07-17 — Substrate weakness on current-state TP interpretation, flagged for Block 021 worked example
- 2026-07-19 — **5y5y forward direction-of-trade framing corrected (Session 27 cold-recall, refactor tag `refactor-2026-07-19-block-020-5y5y-sign-v2`):** the canonical convention is swap-style — **LONG 5y5y forward = receive fixed / pay floating = bet 5y5y falls from current level (gains MTM as floating drifts down)**; **SHORT 5y5y forward = pay fixed / receive floating = bet 5y5y rises from current level (gains MTM as floating drifts up)**. The wedge-compression thesis (5y5y above Fed LR, betting on convergence) = **LONG 5y5y**. The wedge-expansion thesis (5y5y below Fed LR, betting market is right) = **SHORT 5y5y**. **This is a second-pass correction** — the earlier Session 27 close note (line below) had the direction inverted: it described LONG 5y5y as "locking in the high current rate and gains MTM if floating drifts down" which is a confused description (the "high" framing is what to lock in, but the gain mechanism is that PV(floating) falls, not that "floating drifts to Fed LR"). The first audit pass applied this confused framing to Anki note 1784289832127; this second pass replaces it with the cleaner mechanics (PV(fixed) = PV(floating) at entry; MTM from PV(floating) moving opposite to your position). **Session 26 historical entries** in `session-log.md` (line 621), `competence-map.md` (line 79), and the prior Block 020 line 36 used a *rates-trading-futures-style* convention ("short 5y5y forward = receive fixed = bet on compression") that conflicts with the swap-style convention now locked — these are NOT rewritten, the convention evolution is documented here.

See `../session-log.md` for the full session record and `../competence-map.md` for the eight new Working+ items promoted this session.