How China Is Keeping Treasuries Cheap Amid Haven Stampede

  • China said to sell Treasuries to smooth the yuan’s deprecation
  • Gross says on Twitter: ``China selling long Treasuries ????''

For investors baffled by why Treasuries haven’t rallied more amid $8 trillion in losses on equities in the past two weeks, a post from Bill Gross may have given a clue.

“China selling long Treasuries ????” Gross, who manages the $1.47 billion Janus Global Unconstrained Bond Fund, tweeted Wednesday.

https://twitter.com/JanusCapital/status/636609966669869056

With the world’s No. 2 economy cooling, the People’s Bank of China has been buying yuan and selling dollars to steady the exchange rate following its shock yuan devaluation on Aug. 11. To help smooth that depreciation, China has reduced its holdings of U.S. Treasuries this month, people familiar with the matter said Thursday.

The bank has sold at least $106 billion of its $3.7 trillion trove of reserve assets in the last two weeks, including Treasuries, according to an estimate from Societe Generale SA.

Yield Block

As a result, yields on Treasuries, a benchmark for corporate and consumer borrowing costs, are higher than they’d otherwise be as investors have sought a refuge from flailing stocks. Even after equities teetered into correction territory this week, Treasuries-- the world’s premier safe-haven investment -- still trade around their one-year average.

"By selling Treasuries to defend the renminbi, they’re preventing Treasury yields from going lower despite the fact that we’ve seen a sharp drop in the stock market," David Woo, head of global rates and currencies research at Bank of America Corp., said on Bloomberg Television on Wednesday. "China has a direct impact on global markets through U.S. rates."

The benchmark U.S. 10-year note yielded 2.15 percent as of 9:08 a.m. in London, compared with a one-year average of 2.18 percent, according to Bloomberg Bond Trader data. Yields haven’t closed below 2 percent in the past two weeks even though traders have slashed the probability that the Federal Reserve will raise interest rates next month, to 26 percent from 50 percent three weeks ago.

At 2.90 percent, 30-year yields exceed their 2.87 percent average of the past year.

Reserve Calculus

Societe Generale’s estimate of $106 billion of reserve asset sales comes from its calculation of how much liquidity the PBOC will add to the country’s financial system through Tuesday’s reduction of interest rates and the reserve-requirement ratio. The assumption is that the central bank aims to replenish the funds it drained when it bought yuan to stabilize the currency.

“When equity markets tumbled on Monday afternoon, some emerging-market currencies almost collapsed and the central banks sold Treasuries and maybe European government bonds as well,” Eric Vanraes, a fund manager in Geneva at EI Sturdza Investment Funds, which oversees about $2.7 billion, said Wednesday. “That’s why we didn’t experience such a big rally in bonds.”

Gross didn’t respond to an e-mail message Wednesday seeking comment on his tweet.

China, with $1.27 trillion of Treasuries as of June, is the biggest overseas holder of the debt, according to data compiled by Bloomberg.

In a sign that international buyers’ appetite for Treasuries may be fading, purchases from non-dealer bidders, a group of investors that includes foreign central banks and mutual funds, fell at auctions this week. Their demand for five-year notes at a sale Wednesday was the lowest since October.

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