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Federal deficits aren't the primary driver of Treasury yields, DataTrek analysts said, after Moody's Investors Service cut its outlook on US credit from "stable" to "negative."
Instead, monetary policy, structural inflation pressures, and global investors' preferences matter more to bond yields, they wrote in a note issued Sunday.
"Rating agencies have an important role in capital markets, but their decisions should not be the only factor in how asset owners choose to allocate capital," the note said.
Comparing the difference in the yield between German bunds and US Treasurys tells a different story about whether investors are actually demanding a greater premium for deeper deficits.
Bunds are issued by a German government that caps deficits at 3% of the GDP, while the US federal deficit is currently at 6% of GDP.
But the gap in the two bond yields is at 1.9 percentage point, far below the peak in November 2018, when it was 2.8 percentage points.
One reason why murmurs of a Treasury relapse were afoot is because many believe Fitch's downgrade US's long-term rating in August contributed to a historic bond market meltdown. Concerns about piling US debt has had market experts like Ed Yardeni seeing a comeback of the bond vigilantes who famously dumped US Treasurys in the 1990s to rein in federal deficits.
"As important as deficits are for many reasons, they are not the primary driver of Treasury yields," DataTrek wrote. "Not yet, anyway. If they were, the US would be paying much more than Germany to issue bonds."
