MW: Treasurys draw safety bid as China stocks tank
Treasury prices rose Monday, weighing on yields, as investors sought safe assets during a global stock selloff led by a sharp decline in Chinese markets.
A mixed U.S. durable goods report, which showed that orders increased but overall business investment remained soft, added to the buying momentum in Treasurys pushing yields further down.
Monday’s fall came after Treasury yields recorded their largest two-week decline in four months, ahead of the Federal Reserve’s two-day meeting that starts Tuesday, which could determine whether the data-dependent Fed is closer to the first interest-rate increase in nearly a decade.
Read: MarketWatch’s Fed meeting preview
Yields could fall even further, as the market is now clearly in a “bullish phase,” benefiting from the selloff in commodities and the continuing Chinese stock meltdown, Tom di Galoma, head of rates and credit trading at ED & F Man Capital Markets, said in a note.
The yield on the 10-year Treasury TMUBMUSD10Y, -1.19% fell 5.7 basis point to 2.216%, according to Tradeweb. The yield on the two-year note TMUBMUSD02Y, -4.76% declined 2.4 basis points to 0.658% and the yield on the 30-year bond TMUBMUSD30Y, -0.45% shaved off 4.8 basis points to 2.923%.
Treasury yields fall as prices rise and vice versa.
While crude continued to slide Monday, U.S. stocks were on track to add to last week’s sizable losses, after the Shanghai Composite SHCOMP, -8.48% closed 8.5% lower for its biggest one-day slide since February 2007.
The long-end of the Treasury yield curve got the biggest flight-to-quality bid from the broad stock meltdown, noted analysts from Jefferies. But the short-end of the curve, consisting of shorter -term notes, is where investors should focus, as that is most vulnerable to Federal Open Market Committee decisions.
“While the bid to the back of the curve makes sense, the front-end of the curve has lagged too much.The weight on the front remains as we approach the key FOMC meeting,” Chris Bury, head of U.S. swaps trading, said in a note.
The so-called back of the curve, or long end, refers to the longer-dated maturities, while the front-end, or short-end, represents short-term Treasury bills and notes.
Read: Falling oil prices add to high-yield bond market’s long list of woes
In Europe, government bonds were also rallying Monday, as European stocks fell and investors sought safe assets.
Market watchers were also following the Greek debt situation, where the debt-burdened country and its creditors were set to start discussions on Monday on a third bailout deal.
Yields were down across the eurozone, with small declines less than one basis point in the more stressed economies of the European south and bigger declines of 1.5 to 2.4 in the larger economies. The yield on the benchmark German 10-year bund TMBMKDE-10Y, -0.09% fell two basis points to 0.631%.
