BLBG: Treasuries Drop for 2nd Day as Stocks Gain on End to Fixed Yuan
By Matthew Brown and Theresa Barraclough
June 21 (Bloomberg) -- Treasuries fell for a second day as China said it will allow a more flexible yuan, boosting confidence in the global recovery and triggering gains in stocks around the world.
Longer-maturity bonds led declines after the People’s Bank of China two days ago indicated it’s abandoning the 6.83 yuan peg to the dollar adopted to protect exporters during the global financial crisis. The decision to end the yuan’s peg was made after the world’s third-largest economy improved, the central bank said in a statement on its website. The Stoxx Europe 600 Index advanced 1.3 percent and the MSCI Asia Pacific Index of shares gained 2.5 percent.
“It’s a vote of confidence in the Chinese economy and the global economy and so will boost risk assets at the expense of Treasuries,” said Nick Stamenkovic, a fixed-income strategist at RIA Capital Markets Ltd. in Edinburgh. “China would not have depegged if it did not think the recovery was for real.”
The yield on the 10-year note rose seven basis points to 3.3 percent as of 10:56 a.m. in London, according to BGCantor Market Data. The 3.5 percent security due May 2020 dropped 20/32, or $6.25 per $1,000 face amount, to 101 22/32.
Signs the global economy is able to overcome Europe’s debt crisis have lowered demand for Treasuries, sending the 10-year yield up from the 3.06 percent it slid to on May 25. It will reach 3.8 percent by the end of the year, according to forecasts compiled by Bloomberg.
Spain sold 3.5 billion euros ($4.3 billion) of debt last week at yields below market value, assuaging concern it will need help to raise funds. Concern some European lenders may become insolvent receded after the European Union said it will publish results of bank stress tests.
Currency ‘Flexibility’
The People’s Bank of China said on June 19 it will allow greater currency “flexibility.” Yesterday, it ruled out “large changes” in the exchange rate and said it will prevent “excessive” moves.
Investors remained bearish on U.S. debt, according to a survey of money managers by Ried Thunberg ICAP Inc.
The company’s index measuring the outlook for Treasuries through the end of December was little changed at 42. A figure below 50 shows investors expect prices to decline. The company, based in Jersey City, New Jersey, interviewed 23 fund managers controlling $1.33 trillion of assets.
China’s announcement will also hurt Treasuries as it means the central bank will have fewer dollars to purchase the securities, according to UBS AG.
‘Slower Accumulation’
“Somewhat slower reserve accumulation will lead to slower accumulation of U.S. Treasuries,” analysts led by Mansoor Mohi- uddin, the global head of foreign-exchange strategy at UBS in Singapore, wrote in a report dated yesterday.
Treasuries also declined before the government sells $108 billion of notes this week.
The Treasury will auction $40 billion in two-year debt tomorrow, $38 billion in five-year notes the following day and $30 billion in seven-year securities on June 24. The total is $5 billion less than last month’s sales of the same maturities.
Indirect bidders, an investor class that includes foreign central banks, bought 36 percent of the two-year notes at the prior auction in May, compared with an average of 42 percent over the past 10 sales.
Treasuries of all maturities are still headed for the best first half in a decade on speculation reduced inflationary pressures will prompt the Federal Reserve to keep interest rates near zero.
‘Continue South’
“Treasury yields will continue south,” said Akira Takei, a fund manager in Tokyo at Mizuho Asset Management Co., a unit of Japan’s second-largest bank. “Inflation is not imminent and in fact, we should be more concerned about deflation. The Fed cannot raise rates any time soon.”
The consumer price index declined 0.2 percent in May from the previous month, the biggest drop since December 2008, a Labor Department report showed on June 17.
The difference in yields between 10-year Treasury Inflation- Protected Securities, or TIPS, and comparable conventional notes showed money managers expect the consumer price index to increase an average 2.02 percent a year in the next decade, down from 2.41 percent at the end of 2009. The spread narrowed to 1.83 percent on May 21, the least since Oct. 9.
U.S. policy makers will hold the benchmark interest rate at a record-low range of zero to 0.25 percent at the end of their next two-day meeting on June 23, according to all economists in a Bloomberg News survey.
The central bank reiterated at the end of its April 28 meeting that it intended to keep its benchmark rate near zero for an “extended period” to help spur the recovery.
Futures on the CME Group Inc. exchange showed a 77 percent chance the Fed will maintain or cut rates by its December meeting at the end of last week, up from 62 percent a month earlier.
Treasuries have returned 3.9 percent since Dec. 31, heading for the largest gain in the first six months of a year since 2000, Bank of America Merrill Lynch indexes show.
To contact the reporters on this story: Matthew Brown in London at mbrown42@bloomberg.net; Theresa Barraclough in Tokyo at tbarraclough@bloomberg.net
