Back in March, the last time we saw a notable and relatively sustained rise in Treasury yields, we pointed out a potential driver for this 'apparent' weakness - the heaviness of investment grade corporate bond issuance. This drives relative selling pressure in Treasuries for three potential reasons: pre-emptive rate locks are positioned; managers hedge away interest-rate duration to lock in the 'spread' on the bonds as they are jig-sawed into existing portfolios; and most simply speculative rotation from Treasury bond 'cash' into new issues (thus avoiding the convexity issues associated with such low yields on existing 'secondary' bonds). As the charts below show, in March, as we noted at the time, issuance expectations (the forward calendar) were falling and we suggested Treasury yields would drop as this implicit selling pressure would also lift. While this time Gross and Singer have spurred some risk-aversion, no doubt, the IG calendar suggests a lifting of the selling pressure soon here too.
10Y Treasuries exhibiting similar drive higher in yield...
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March 2012 corporate bond issuance vs Treasury yields...
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and the current (and recent issuance) and Treasury yields...
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So while most see Treasury weakness as a sign of that final rotation to risk assets and cheer the data, we posit that perhaps it could be merely a small reach for yield in a positive market environment for corporate bond issuance when supply is heavy and demand just as much so with fund flows staying high...
Data: Bloomberg