Treasuries Rise as China's Stock Slide Drives Demand for Safety

  • Some of China's largest brokerages disclose regulatory probes
  • U.S. yields also drop on wagers of gradual Fed rate increases

Treasuries rose, pushing 10-year yields to a three-week low, as a drop in Chinese equities drove demand for the relative safety of U.S. government debt.

Benchmark yields headed for a third weekly decline amid speculation U.S. policy makers will take a gradual approach to raising interest rates following a December liftoff. Chinese stocks tumbled the most since the depths of a rout in August as some of the nation’s largest brokerages disclosed regulatory probes. Bond markets in the U.S. will close at 2 p.m. New York time after the Thanksgiving holiday.

“Equity markets around the world are lower, and that’s mainly China,” said
Christopher Sullivan, who oversees $2.4 billion as chief investment officer at United Nations Federal Credit Union in New York. “That drew support from the get-go. European bond yields were lower and the U.S. followed.”

U.S. 10-year yields fell one basis points, or 0.01 percentage point, to 2.22 percent as of 2:15 p.m., according to Bloomberg Bond Trader data. They dropped earlier to 2.20 percent, the lowest since Nov. 4. The benchmark 2.25 percent note due in November 2025 climbed 1/8, or $1.25 per $1,000 face amount, to 100 1/4.

Biggest Loss

Treasuries are still down about 1 percent during the past month, making them the worst performers among 26 bond markets around the world tracked by Bloomberg and the European Federation of Financial Analysts Societies.

The probability the Fed will increase its benchmark by its Dec. 15-16 meeting is 72 percent, according to futures data compiled by Bloomberg. The calculation is based on the assumption the effective federal funds rate will average 0.375 percent after liftoff, compared with the current range of zero to 0.25 percent.

“We had some negative news on China,” said Allan von Mehren, chief analyst at Danske Bank A/S in Copenhagen. “We still see pressure on commodity prices as well. That’s probably leading to some downward pressure on U.S yields.”

While it “seems pretty clear the Fed are going to hike in December” they’ll probably move “very gradually,” he said.

Danske Bank’s von Mehren said he expects “another leg higher” in U.S. 10-year yields, which may touch 2.5 percent in the next two to three months.

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