- Fed meetings may not be the biggest mover of the bond market, Societe Generale said.
- The massive supply of government bonds, especially US Treasurys, is emerging as a key driver of yields.
Despite US bond yields plunging after Wednesday's Federal Reserve meeting, central bankers may not be moving the market as much as other factors, according to Societe Generale.
On Thursday, the 10-year Treasury yield sank 15 basis points to 4.64%, adding to a steep dive the day prior.
But in a note after the Fed meeting, SocGen strategist Albert Edwards pointed to increased commentary that the Treasury Department's announcements on bond issuance are a bigger market mover.
"Massive supply of government bonds, most especially in the US, has become a key, if not the key, explanation for rising yields via rising term-premia," he wrote.
Previously, Fedspeak led investors to believe the central bank may hike rates again, contributing to a massive Treasury meltdown.
But ramped-up debt issuance is lifting yields right now because it's coming at an awkward time: demand for US bonds is low, so investors are demanding higher returns.
The latest announcement from the Treasury Department this week noted that the US expects to borrow $776 billion in the October-December quarter, which is $76 billion below July estimates. Still, projected borrowing is expected to climb to $816 billion in the next quarter.
Another factor elbowing yields higher is the Bank of Japan, according to Edwards.
This week, the BoJ further loosened its grip on bond yields, marking another step back from its so-called yield curve control policy meant to stimulate the economy by keeping interest rates low.
The last time the BoJ eased off on YCC pedal in July, US Treasurys "went into a tailspin that has yet to end" as they face more competition from higher Japanese bond yields, Edwards wrote.
"That pressure intensified at exactly the same time as it became apparent just how gargantuan US Treasury issuance had become," he added. "This wasn't just a large bitter pill for the public to swallow, but one that got stuck in their throats, forcing 10y yields as high as 5%."