Treasuries Decline After Chinese Stimulus Eases Refuge Demand

Treasuries declined amid speculation Chinese policy makers will take more steps to sustain the nation’s economic expansion, easing demand from investors seeking a refuge from the risk of slower global growth.

Yields rose as China lowered the amount of cash lenders must set aside as reserves by the most since 2008, helping to trigger rallies in stocks and oil. Yields dropped earlier after New York Federal Reserve President William C. Dudley said U.S. monetary policy will remain accommodative once the central bank lifts interest rates, likely in 2015.

“There’s a consensus view that the People’s Bank of China is going to put on more stimulus,” Larry Milstein, managing director in New York of government-debt trading at R.W. Pressprich & Co. “We may get more aggressive central-bank action, which spells a little bit of Treasury weakness, a little bit of risk-on this morning.”

The U.S. 10-year yield rose two basis points, or 0.02 percentage point, to 1.89 percent as of 5 p.m. New York time, according to Bloomberg Bond Trader data. It touched 1.85 percent, close to the 1.82 percent on April 6 that was the lowest since January. It compares with a five-year average of 2.60 percent. The price of the benchmark 2 percent note due in February 2025 fell 7/32, or $2.19 per $1,000 face value, to 100 31/32.

Oil futures rose 1.3 percent to $56.44 per barrel in New York and have advanced 5 percent this year, after plunging almost 50 percent in the second half of 2014. The Standard & Poor’s 500 Index of stocks added 0.9 percent to 2,100.40.

Fast Money

“Some fast money is moving with the stock market,” said Thomas di Galoma, head of fixed-income rates and credit at ED&F Man Capital Markets in New York.

The gains in oil have helped push one of the bond market’s most closely watched measures of inflation expectations, the break-even rate, to the highest level since September as investors seek a hedge against rising consumer costs. That may boost the appetite for $18 billion in Treasury Inflation Protected Securities the U.S. is selling April 23.

“It’s going to be a very interesting TIPS auction this week, mainly because oil is up this year,” di Galoma said. “It’s going to bring people back into the TIPS sector.”

While the Fed’s Dudley said he is relatively optimistic that a rebound in U.S. growth after a slow first quarter will support a decision to raise interest rates later this year, “it does not mean that U.S. monetary policy will be tight.” He spoke at the Bloomberg Americas Monetary Summit in New York.

‘Cautious’ Outlook

“He’s definitely more cautious in his outlook, still hopeful that it will support a rate hike later this year,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi UFJ Securities USA Inc. “They’re not as confident after this first quarter where things are going.”

Fed policy makers last month were split over whether they would raise rates in June or later, a debate that occurred before disappointing payroll figures for March, minutes of their most recent policy meeting showed. The payrolls results were followed by below-forecast readings for factories, retail sales and jobless claims.

Policy makers will increase borrowing costs in about eight months, according to a Morgan Stanley index.

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