Treasuries Halt Rally as China Stocks Drop Eases Amid Auctions

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Chinese Government Support Tested as Stocks Extend Rout

Treasuries fell for the first time in a week as oil prices and Chinese stocks slowed their declines.

U.S. yields rose as the Treasury Department sold $26 billion of two-year notes, the first leg of $90 billion of fixed-coupon Treasury note sales this week. The Federal Reserve meets Tuesday and Wednesday. Chair Janet Yellen said earlier this month that she expected to raise interest rates this year.

“Asia may still have some issues, but the rest of the world has its own economy,” said Jim Vogel, interest-rate strategist with FTN Financial in Memphis, Tennessee. Before the Fed meeting, “you aren’t going to try and load up on Treasuries today, since things could get cheaper tomorrow.”

The benchmark U.S. 10-year note yield advanced three basis points, or 0.03 percentage point, to 2.25 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. The 2.125 percent security due in May 2025 fell 9/32, or $2.81 per $1,000 face amount, to 98 7/8.

The two-year notes yielded 0.690 percent at the auction, compared with an average forecast of 0.692 percent from six of the 22 primary dealers that are obligated to bid.

China’s Shanghai Composite Index closed with a 1.7 percent drop, trimming losses of as much as 5.1 percent. It tumbled 8.5 percent on Monday, the most since 2007. The Bloomberg Commodity Index rebounded 0.8 percent.

Haven Flows

U.S. government securities have benefited this month as investors sought the safest assets while commodities and stocks fell. Treasuries have returned 1 percent in July through Monday, headed for their biggest monthly gain since January, based on Bloomberg World Bond Indexes.

The Bloomberg Commodity Index has plunged 10 percent this month. The MSCI All-Country World Index has declined almost 1 percent including reinvested dividends.

“That tells me the problems out of China are really significant, and they aren’t going away,” said Guy Haselmann, an interest-rate strategist at Bank of Nova Scotia in New York, a primary dealer.

Haselmann said he thinks that will support Treasuries, and predicted that the yield on the 10-year note will fall below 2 percent in the next few months.

The probability that the Fed will raise interest rates at this month’s meeting is 2 percent, rising to 74 percent by year-end, based on futures data compiled by Bloomberg.

Treasury will sell $35 billion of five-year securities Wednesday, as well as $29 billion in seven-year securities the following day.

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