Low Bond Supply Pushes Yields Lower

Bond yields have stymied widespread expectations they would rise this year and analysts seeking a reason may not need to dig any deeper than simple supply and demand.
“On the supply side, bond issuance plummeted, down 19 percent year-to-date. Amidst short supply, a surge in positioning and bond inflows has pushed yields lower,” Deutsche Bank said in a note last week.

It noted U.S. Treasury net issuance is around $123 billion year-to-date, down 59 percent from a year earlier, while net issuance of corporate paper and mortgage backed securities has also fallen.

At the same time, “on the demand side, bond futures positioning was short coming into 2013 and has now turned very long, led by hedge funds,” it said. “Although the Federal Reserve reduced purchases, foreigners, U.S. banks and pensions increased their bond buying.”

Analysts had widely expected interest rates would rise as the Fed began pulling back its asset purchases in January and as investors shifted out of bonds to seek more risk in equity markets.

via CNBC

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Alfonso Esparza

Alfonso Esparza

Senior Currency Analyst at Market Pulse
Alfonso Esparza specializes in macro forex strategies for North American and major currency pairs. Upon joining OANDA in 2007, Alfonso Esparza established the MarketPulseFX blog and he has since written extensively about central banks and global economic and political trends. Alfonso has also worked as a professional currency trader focused on North America and emerging markets. He has been published by The MarketWatch, Reuters, the Wall Street Journal and The Globe and Mail, and he also appears regularly as a guest commentator on networks including Bloomberg and BNN. He holds a finance degree from the Monterrey Institute of Technology and Higher Education (ITESM) and an MBA with a specialization on financial engineering and marketing from the University of Toronto.
Alfonso Esparza