Treasuries Decline After China Rate Cut Reduces Haven Demand

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  • U.S. 10-year note yields climb to highest since Oct. 8
  • People's Bank of China cut rates by 0.25 percentage point

Treasuries fell, with 10-year note yields touching a two-week high, after China’s central bank lowered its benchmark lending rate and reserve requirements for banks in an effort to curb an economic decline.

U.S. yields rose for a second day as investors see China’s efforts to address its problems as easing turmoil in emerging markets and lessening demand for haven assets. The People’s Bank of China cut its one-year lending and deposit rates by 0.25 percentage point amid a deepening economic slowdown that’s roiled financial markets since the beginning of the summer.

“You’ll see a lot more selling, you’ll see a little more certainty that things are improving, so continued pressure on the long end of the curve,” said Aaron Kohli, a fixed-income strategist at Bank of Montreal, one of 22 primary dealers that trade with the U.S. central bank. “It’s not a magic bullet, but, at the very least it will soothe investors’ concerns about emerging markets.”

The yield on the 10-year Treasury note rose six basis points, or 0.06 percentage point, to 2.09 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data, after touching its highest since Oct. 8. The price of the 2 percent U.S. security maturing in August 2025 dropped 17/32, or $5.31 per $1,000 face amount, to 99 7/32.

Central Banks

The move by the Chinese central bank helped bolster risk appetite, with stocks rising around the world and U.S. bond market inflation expectations rising to the highest levels in two weeks, forecasting a rate of 1.52 percent during the next 10 years.

China’s action comes as central banks from Europe to Japan are considering additional stimulus, a contrast to the Federal Reserve as it seeks to raise interest rates. Last month the Fed suggested that slowing global growth led by China had contributed to its decision to hold interest rates near zero, as it has since December 2008.

China’s rate cut “is helping global growth at the margin,” said Priya Misra, head of global interest-rate strategy in New York at TD Securities, a primary dealer. “It makes the Fed more likely to hike.”

Traders raised their bets on a Fed rate increase by the central bank’s March meeting, with a 60 percent probability of an increase at or before the central bank’s March meeting, up from 57 percent Thursday, Bloomberg data show. The odds of an increase this year rose to 36 percent, from 34 percent the day before.