It's an article of faith in the credit markets that certain fundamental forces propel the yields on government debt, specifically economic growth, state spending, inflation and central bank guidance.
Not so, says HSBC Holdings Plc fixed-income analysts led by Steven Major. Instead, high debt levels, demographic forces and wealth inequality overwhelm the traditional forces cited for the feared unravelling of the bond market's 35-year bull run this year.
"We show that many of the common rules of thumb or ‘heuristics’ that are applied to bond yields are simply false," Major wrote in a client note this week.Major and his team believe that while Treasuries reflect key economic data, it's not clear that they're still the principal drivers of yields.
The report also defends Major's eye-catching prediction last November that 10-year Treasury yields will hit 1.35 percent at end of 2017, compared with the median forecast of 2.75 percent in a Bloomberg survey.
Take a look at what Major and his team consider four common misconceptions cited by bond bears.
1. Bond yields dance to the beat of nominal economic growth
Surprisingly, there isn't a strong long-term correlation between the movement of Treasury yields and U.S. economic momentum before inflation, as seen in the weak relationship between growth surprises and changes in 10-year yields relative to their forecasts.
2. Fiscal loosening triggers an upturn in Treasury yields
It's not clear that Treasury supply dramatically affect yields, as evidenced by the weak relationship between year-over-year changes in debt-to-GDP levels and the five-year, five-year forward inflation rate.
3. Fed guidance drives yields