There’s room for US Treasury yields to fall further, but the floor’s higher now than it was over the summer.

That’s according to Goldman’s Praveen Korapaty, who predicted the nascent bond rally.

The outsized decline in long-end yields witnessed over three sessions last week is the talk of the proverbial town. “The move appears to confirm our view that bonds were oversold,” Korapaty remarked, modestly.

He attributed the rally to a trio of factors which every regular reader can hopefully recite: Smaller-than-expected coupon increases in the refunding announcement, soft data and long-end positioning, which Korapaty described as “somewhat short in at least a portion of the investor base.” “The magnitude of market moves both on the way up, and now on the way down, are exaggerated relative to the size of information surprises,” he went on.

The figure below shows the breakdown of the decline in yields from the recent peak by PCA factor.

The vast majority (~40bps out of ~50) is down to growth (i.e., weaker data) and policy (i.e., the FOMC meeting).

Although Goldman sees some scope for the long-end rally to run, Korapaty suggested the move at the front-end is overdone, or nearly overdone. “Investors are again starting to price too much easing,” he said.

As for the refunding, Goldman stated the obvious: The market was surprised by the slower pace of increases at long tenors. Korapaty predicted that too, for what it’s worth. “We had flagged this possibility previously given the amount of term premium that had built up on that part of the curve,” he wrote, adding that “on net, duration supply measured in 10-year equivalents” was consistent with the bank’s forecast, but below market expectations.

Korapaty said the attendant bull flattener (discussed briefly here) looked “disproportionate to the historical beta,” underscoring the notion that positioning was short.