Bonds Rise Around World as China’s Yuan Move Dims Rates Outlook

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Developed-market government bonds rose after China devalued the yuan by the most in two decades to combat an economic slowdown, boosting demand for fixed-income assets.

European securities rallied along with Treasuries on speculation China’s move signaled a deepening slowdown that will weigh on global growth and encourage central banks to keep interest rates lower for longer. A drop in commodities prices on the news from China added to the appeal of government debt as it weighed on the inflation outlook.

Odds the Federal Reserve will raise interest rates next month slipped to 44 percent, down from 54 percent at the end of last week, as investors weighed how the U.S. central bank will react to China’s devaluation.

“It’s unambiguously bullish for fixed-income markets,” said Steven Major, the global head of fixed-income research at HSBC Holdings Plc in London. “This is another easing move by one of the biggest” central banks, he said. “If you were a central bank that was very close to hiking rates maybe you would reconsider? My first thoughts went to the Fed. This is one part of the world pushing its disinflation pressure on to another via the currency shift.”

Germany’s 10-year bund yield fell seven basis points, or 0.07 percentage point, to 0.63 percent as of 4:29 p.m. London time. The 1 percent security due August 2025 rose 0.69, or 6.90 euros per 1,000-euro ($1,106) face amount, to 103.60.

The People’s Bank of China cut its daily reference rate versus the dollar by 1.9 percent and said market forces will play a greater role in the currency.

Yields Slide

Benchmark Treasury 10-year note yields declined nine basis points to 2.13 percent and those on U.K. 10-year gilts fell 10 basis points to 1.82 percent. Japan’s 10-year bond yields slid two basis points, the most in a week, to 0.39 percent.

Euro-region peripheral bonds also climbed after Greece concluded a deal on the terms of its third bailout, paving the way for funds to be dispersed in time for an Aug. 20 payment to the European Central Bank.

Italian 10-year bond yields dropped five basis points to 1.78 percent and those on similar-maturity Spanish debt fell five basis points to 1.92 percent.

China had been propping up the yuan to deter capital outflows, protect foreign-currency borrowers and make a case for official reserve status at the International Monetary Fund. Its authorities have been expanding efforts to quell the deepest economic slowdown since 1990, in which exports have slumped more than analysts predicted.

‘Less Certain’

“If you thought the Fed was going to hike yesterday you might be a bit less certain now,” said HSBC’s Major. “We already know the ECB is going to be loose, but they will have to be assimilating this information, as well as the Bank of England. All of these central banks that have an external focus will now have to recalibrate.”

The yield difference between German 10-year bunds and similar-maturity Treasuries narrowed by two basis points to 151 basis points. The spread reached 150 on Aug. 7, the least since July 10, according to closing-price data compiled by Bloomberg.

Slower interest-rate increases from the Fed diminishes the divergence in policy with the ECB that is engaged in a 1.1-trillion euro stimulus plan.

Oil dropped amid a broader slide in commodities after China’s devaluation. West Texas Intermediate crude has slumped more than 25 percent since this year’s peak closing price in June, which has damped the outlook for global inflation. Slower inflation helps preserve the purchasing power of the fixed payments from bonds.

“Core European government bonds being supported by weaker commodity prices and the rally in U.S. Treasuries overnight as a result of the move by the PBOC,” said Nishay Patel, a London-based fixed-income strategist at UBS Group AG. The devaluation “will make imports of raw materials more expensive and this has dragged commodity prices lower.”

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