Treasuries Regain Refuge Status as China Yuan Cut Pummels Stocks

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Treasuries rose, with 10-year note yields dropping to the lowest in more than two months, after China’s devaluation of the yuan sparked a plunge in global stocks and commodities, fueling speculation the Federal Reserve may delay an increase in interest rates.

U.S. bonds reclaimed their haven status after China’s announcement boosted demand for dollar-denominated assets. The People’s Bank of China cut the yuan’s daily reference rate by the most in two decades to combat a slump in exports, dragging down Asian currencies.

“There’s a shock element, that’s an aspect of the Treasuries move,” Robert Tipp, chief investment strategist in Prudential Financial’s fixed-income unit, which oversees $550 billion, said from Newark, New Jersey. “It leaves people wondering if there’s more going on in China than meets the eye and how long-lasting and far-reaching any knock-on effects on other markets will be.”

Ten-year U.S. note yields fell nine basis points, or 0.09 percentage point, to 2.14 percent at 5 p.m. New York time, the lowest since May 29, according to Bloomberg Bond Trader data.

‘Disinflation Scare’

U.S. two-year yields, among the most sensitive to interest-rate expectations, declined five basis points to 0.67 percent. Stocks tumbled around the globe.

“Some of it is about risk aversion and some is about economic expectations,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which manages $61 billion in assets. “Devaluation of the Chinese yuan is a way for the U.S. to import deflation from China.”

Prices of oil and industrial metals fell, sending the Bloomberg Commodity Index lower by 1.6 percent.

“It’s going to create some deflationary pressure,” said Neil Bouhan, an interest-rate strategist with BMO Capital Markets in Chicago. “The fall in oil has put a real disinflation scare back in.”

Traders are pricing in a 46 percent chance the Fed will raise borrowing costs at its September meeting, based on the assumption that the benchmark rate will average 0.375 percent following the increase, data compiled by Bloomberg show. That’s down from 54 percent on Aug. 7.

Treasury Auctions

“It weakens the case for the Fed,” said Jim Vogel, head of interest-rate strategy at FTN Financial in Memphis, Tennessee. “China was weaker than people thought and it will take longer for commodity demand to pick up.”

The probability of the Fed’s rate being lifted further by March slipped to 51 percent from 58 percent at the end of last week, according to data compiled by Bloomberg. Policy makers have kept the U.S. benchmark interest rate near zero since 2008 to support the world’s largest economy.

The Treasury Department on Tuesday sold $24 billion of three-year notes at a yield of 1.013 percent, compared with an average forecast of 1.012 percent from six primary dealers. The bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 3.34 compared with an average of 3.29 at the past 10 sales.

The U.S. is set to auction $24 billion of 10-year notes on Wednesday and $16 billion of 30-year bonds on Aug. 13.

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