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.