Treasuries Gain as Haven Bid Outweighs Speculation China Selling

  • Yields fall as U.S. stocks off to worst-ever annual start
  • U.S. jobs data due Friday, Fed signals on rates limit demand

Treasuries rose, staging their longest winning streak in a year, as safe-haven buying outweighed speculation China is selling Treasuries.

Yields dropped as stocks tumbled globally, with the Standard & Poor’s 500 Index capping its worst-ever start to a year. Longer maturities briefly fell in price during U.S. hours amid speculation that China will sell more dollar-denominated assets to limit the yuan’s tumble. U.S. debt still ended the New York trading day higher as equities declines deepened.

“Treasuries are a good investment for the next several weeks while we wait out this particular episode,” Bill Gross, who manages the $1.3 billion Janus Global Unconstrained Bond Fund with Kumar Palghat, said in an interview on Bloomberg Television.

The 10-year yield fell two basis points, or 0.02 percentage point, to 2.15 percent as of 5 p.m. in New York, according to Bloomberg Bond Trader data. The price of the 2.25 percent note due in November 2025 rose about 1/4, or $2.50 per $1,000 face amount, to 100 29/32, for a sixth straight day of gains, the longest streak since January 2015. The yield has fallen from 2.3 percent when the Federal Reserve shifted rates Dec. 16.

China’s Role

Global economic weakness has boosted government debt to start 2016, pushing yields back below levels from when the Fed lifted rates from near Dec. 16. The concern has centered on China, where slowing growth is fueling declines in stocks and the yuan. The tumult in China’s markets raises risks for Treasuries as well. In December, its foreign-exchange reserves slid as authorities sought to prop up a weakening currency. About $1.4 trillion of that stash, or a third, is in Treasuries, making China the biggest foreign holder of the securities.

Yet the driver of China’s reserve sales -- a weakening economy -- will keep Treasury yields low, said George Goncalves, head of interest-rate strategy in New York at Nomura Holdings Inc., one of the 22 primary dealers that trade with the Fed.

”This global growth story that’s been driven by these countries for decades is being called into question, at a time when real growth elsewhere isn’t great,” Goncalves said. ”The growth story matters more than the supply-and-demand story.” 

Swaps Sign

Traders saw signs in the swaps market of possible Treasuries selling by China.

Swap spreads, which represent the gap between the rate to exchange fixed- for floating payments and Treasury yields, narrowed Thursday. The move spurred speculation that selling by China, which would push up Treasury yields, was at work.

“Even as people can’t be clear yet if there is now a whole lot of active reserve selling or not by China, the market is shooting first and asking questions later,” said Aaron Kohli, a fixed-income strategist in New York for BMO Capital Markets, a primary dealer. “Swap spreads are tightening on the presumption there is selling.”

The two-year swap spread fell to 9.29 basis points from 10.91 basis points Wednesday, data compiled by Bloomberg show.

The amount of Treasuries that the Fed holds in custody for foreign central banks fell by about 0.7 percent in the week through Jan. 6, the most since September, to $2.98 trillion.

Treasuries’ advance stalled during the U.S. session before labor data set for release Friday, which may back policy makers’ view that the economy remains sound. Employers probably added at least 200,000 nonfarm jobs for the third straight month in December, according to a Bloomberg survey.

Fed Talk

Fed Bank of Richmond President Jeffrey Lacker, speaking Thursday, expressed confidence that inflation will return to the central bank’s target after oil prices and the dollar stabilize.

“While there is uncertainty about the pace at which monetary policy rates will rise, the case for an upward adjustment in rates should be clear,” Lacker said in the text of a speech in Raleigh, North Carolina.

Traders are weighing whether the Fed will raise rates as quickly as policy makers projected in their latest forecasts. Those show officials expect the target to rise to 1.375 percent this year, while derivatives indicate traders expect the rate to rise to 0.8 percent in a year.

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