BofAML's Woo Explains How China Was Behind One of This Week's Most Extraordinary Market Developments
China Must Free-Float Yuan in Order to Cut Rates: Woo
One of the more puzzling events that occurred this week was the failure of long-dated Treasuries to catch a bid while the bottom was falling out of stocks. At times when the Standard & Poor's 500-stock index was plunging on Tuesday and Wednesday, the yield on the 30-year U.S. Treasury bond actually made a move higher, the opposite of what you'd expect when investors are scrambling for a safe haven to park funds in a time of market turmoil. You can see the strange action depicted in the below chart, which compares the yield on 30-year Treasuries (the white line) with S&P futures (the green line). The red-shaded area shows the period of disconnect.
During an interview on Bloomberg TV, David Woo, Bank of America Merrill Lynch's head of global rates and currency research, explained that this curious price action has its roots in Chinese policy.