Treasuries in downdraft on China revaluation news
Thu Jul 21, 2005 08:39 AM ET
NEW YORK, July 21 (Reuters) - U.S. Treasury debt prices, particularly longer-dated securities, fell hard on Thursday morning on news that China had revalued its currency, sparking concern Chinese demand for U.S. debt might start to fade.
Subsequent news on Thursday of fresh emergencies at three London subway stations, did not yet spark a flight-to-quality into the U.S. Treasuries market.
While a China revaluation at 2.1 percent was modest, the market's concern clearly reflected the critical role foreign central banks have played in keeping long-term rates so low even as the Federal Reserve has raised short-term rates rise.
"It was a token revaluation at 2.1 percent. But It's going to potentially create less demand on the long end," said one trader at a Wall Street Treasury dealer.
The benchmark 10-year note (US10YT=RR: Quote, Profile, Research) was 14/32 and yielding 4.21 percent compared with 4.16 percent on Wednesday.
The two-year note (US2YT=RR: Quote, Profile, Research) was 1/32 lower and yielding 3.89 percent.
The consequence of the collective effect of Thursday's action was a widening spread between the yield on the two- and 10-year notes to 31 basis points from 28 basis points on Wednesday.
That spread has been narrowing dramatically since the Fed began raising short-term rates just over a year ago -- in part because of buying by foreign central banks.
Still, some economists were injecting a cautionary note, saying that the revaluation would do little to alter China's appetite for U.S. debt.
"They're going to continue to accumulate dollars that will be invested in U.S. Treasuries. So I don't think this is anything that spells the end of Chinese buying of U.S. Treasuries at all," said Chris Rupkey, senior financial economist at Bank of Tokyo-Mitsubishi in New York. "I would say (Friday's downward move) is a one-day event."