Treasuries Pare Their Decline on Concern Yuan-Led Drop Can't Be Sustained
Treasuries pared losses on speculation the drop in debt in response to China’s decision to allow a more flexible yuan was too big to be sustained.
“The market is coming to the conclusion that it had overreacted to the news out of China,” said Charles Comiskey, head of Treasury trading at Bank of Nova Scotia in New York. “The policy and what it ultimately means is an open question. It’s so vague.”
Longer-maturity bonds led declines after the People’s Bank of China indicated two days ago it’s abandoning the 6.83 yuan peg to the dollar adopted during the global financial crisis to protect exporters. The U.S. will sell $108 billion in two-, five- and seven-year notes this week.
The 10-year note’s yield rose 3 basis points, or 0.03 percentage point, to 3.25 percent at 4:10 p.m. in New York, according to BGCantor Market Data. The price of the 3.5 percent security maturing in May 2020 dropped 7/32, or $2.19 per $1,000 face amount, to 102 5/32.
The yield on the 10-year note earlier advanced 8.5 basis points, the most since June 14 on an intraday basis, to 3.30 percent. The two-year note’s yield was little changed at 0.71 percent after increasing 4 basis points to 0.75 percent.
“We cheapened up, and at that level, money came into the market and went to work, especially on the long end, so we came off the lows,” said Richard Bryant, senior vice president for fixed income in New York at MF Global Holdings Ltd., a broker of exchange-traded futures.
Yuan ‘Flexibility’
China’s central bank indicated on June 19 that while there’s no basis for “large scale” moves in the currency, the exchange rate will be allowed increased “flexibility.” It ruled out yesterday “large changes” in the exchange rate and said it will prevent “excessive” moves.
“A stronger yuan will make China’s exports more expensive and is perceived to be inflationary, so Treasury yields are higher,” wrote Martin Mitchell, head government bond trader in Baltimore at Stifel Nicolaus & Co., in a note to clients.
China boosted holdings of Treasury notes and bonds by 2.6 percent to $900.2 billion in March and April, after reducing its stake by 6.5 percent from November through February, the longest consecutive monthly declines in a decade, U.S. data released June 15 showed.
The Asian nation’s $22.7 billion in Treasury purchases during March and April contributed to a $205.2 billion increase in total foreign holdings. That was the biggest gain since $211.3 billion in June and July of 2009.
Note Auctions
The U.S. government will auction $40 billion in two-year debt tomorrow, $38 billion in five-year notes on the following day and $30 billion in seven-year securities on June 24. The total is $5 billion less than last month’s sales.
“The two-year auction won’t be a home run, but demand in the front end is still relatively strong,” said Jason Rogan, director of U.S. government trading in New York at Guggenheim Partners LLC, a brokerage for institutional investors.
Indirect bidders, an investor class that includes foreign central banks, bought 36 percent of the two-year notes at the prior auction on May 25, compared with an average of 42 percent over the past 10 sales.
The Federal Reserve will hold the benchmark interest rate at a record-low range of zero to 0.25 percent at the end of its two-day meeting on June 23, according to all of the 93 economists in a Bloomberg News survey.
‘Extended Period’
U.S. policy makers reiterated on April 28 that they intended to keep the benchmark rate at virtually zero for an “extended period” to help spur the recovery.
Treasury futures may extend their drop after evidence last week that the U.S. economic recovery is losing momentum failed to push prices above their recent range, according to CRT Capital Group LLC.
“The market’s fully priced,” David Ader, head of government bond strategy in Stamford, Connecticut, at CRT. “The technical patterns are bearish. We’re going to take a step down.”
Futures may fall through a support level of 119 24/32, Ader wrote in an e-mailed note today. While the level of 119 13/32 is “good for a stall,” momentum may push the price as low as 118 26/32, according to Ader.
Economic reports last week showing a drop in consumer prices and housing starts and an increase in unemployment claims didn’t fuel enough demand for U.S. debt to push futures above their range of 114 26/32 to 122 14/32 since the start of March.
The implied yield on 10-year Treasury futures contracts for September delivery rose today two basis points to 3.57 percent. The price fell 5/32 to 120 9/32.
To contact the reporters on this story: Susanne Walker in New York at swalker33@bloomberg.net; Alexander Kowalski in New York at akowalski13@bloomberg.net
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