Treasuries Decline as Chinese Stock Rally Damps Haven Demand

Updated on
  • Stocks gain as China shares rise for first time in five days
  • U.S. companies revive debt issuance after 13-day drought

Treasuries fell as demand for safe assets waned after global stock markets followed Chinese equities higher and U.S. companies resumed debt sales before the Federal Reserve meets next week.

Shares in the U.S. and Europe rose after Chinese stocks advanced for the first time in five days, signaling markets were stabilizing and boosting investor appetite for risky assets. Treasuries also fell as corporate borrowers ended a 13-day hiatus from the bond market and as the Treasury sold $24 billion of three-year notes in the first of three offerings this week.

“It’s all about supply this week, and the focus on international events,” said Thomas Simons, a government-debt economist in New York at Jefferies Group LLC, one of the 22 primary dealers that trade with the Fed. “The corporate issuance calendar is coming to life after a long period of inactivity.”

The benchmark 10-year note yield rose six basis points, or 0.06 percentage point, to 2.18 percent as of 5 p.m. New York time, based on Bloomberg Bond Trader data. The 2 percent security due in August 2025 fell 1/2, or $5 per $1,000 face amount, to 98 12/32.

Corporate Supply

Automatic Data Processing Inc. and Home Depot Inc. were among companies that led a reopening of the corporate bond market Tuesday after global growth concerns kept U.S. investment-grade issuance at bay in the worst late-summer drought since 2005. Bond sales should accelerate as borrowers seek to lock in financing for $420 billion of takeovers expected to be completed by the end of the year, according to data compiled by Bloomberg, and as investors look to reinvest cash.

“They’ve got some wood to chop and they want to get in ahead of the Fed,” said Thomas Roth, senior Treasury trader in New York at Mitsubishi
UFJ Securities USA Inc. “There’s probably some hedging going on, and you’ve got supply.”

Traders are betting the Fed is on course to raise interest rates this year, with futures showing a 59 percent probability the first increase since 2006 will happen by December, based on the assumption that the effective fed funds rate will average 0.375 percent after liftoff. Investors reduced those bets to as low as 45.5 percent on Aug. 25 amid the market turmoil. Policy makers next meet Sept. 16-17.

Treasury Auctions

The U.S. $24 billion three-year debt offering sold at a yield of 1.056 percent compared with the 1.06 percent forecast in a Bloomberg News pre-auction survey of four primary dealers. The offering was rated a “3” on a scale of 1-5, with one being a failed auction and five judging the results as outstanding.

The auction’s bid-to-cover ratio, which gauges demand by comparing the amount bid with the amount offered, was 3.23. The average ratio for the past 10 auctions was 3.28. Indirect bidders, a class of investors that includes foreign central banks, bought 51 percent of the notes compared with the average for the past 10 auctions of 47.9 percent.

The U.S. is scheduled to sell $21 billion of 10-year notes Wednesday and $13 billion of 30-year bonds Sept. 10.