US Treasuries plunge, yuan revaluation carries day
Thu Jul 21, 2005 01:09 PM ET
(Adds details on Philly Fed survey and yuan revaluation; updates prices)
NEW YORK, July 21 (Reuters) - U.S. Treasury debt prices, particularly longer-dated securities, plunged on Thursday on news that China revalued its currency, sparking concerns that Chinese demand for U.S. government debt might start to fade.
The losses largely held even after reports of explosions on London's transport system. The incidents, which followed deadly bombings in London two weeks ago, triggered flight-to-safety Treasuries buying, but not enough to erase early losses.
U.S. Treasuries often gain after major disturbances abroad on the view that the United States is a relative safe haven.
At the U.S. Senate, Federal Reserve Chairman Alan Greenspan reiterated his upbeat testimony on the economy, as he did in his appearance before House of Representatives lawmakers on Wednesday. His fresh commentary did little to prices.
Nor did a report showing activity increasing in July at factories in the region in and around Philadelphia from the Philadelphia Federal Reserve Bank.
The London blasts brought buyers back into the market, but prices headed down once again as it became clear the incidents were not as disruptive as the earlier bombings and caused no deaths.
"That bid has dissipated," a bond trader at a Wall Street dealer said about the London-related buying. "In the long run, there'll probably be less Asian buying of Treasuries," he added explaining the market's concerns about China's move.
The renewed selling pushed yields on benchmark U.S. 10-year Treasury notes above a key barrier at 4.25 percent that traders had repeatedly tested in recent sessions.
At 1 p.m., the 10-year note (US10YT=RR: Quote, Profile, Research) was 26/32 lower in price and yielding 4.26 percent, after ending the day on Wednesday at 4.16 percent.
Two-year notes (US2YT=RR: Quote, Profile, Research) were 3/32 lower and yielding 3.93 percent, up from 3.88 percent on Wednesday.
The five-year note (US5YT=RR: Quote, Profile, Research) fell 13/32 for a yield 4.07 percent from 3.98 on Wednesday. The 30-year bond (US30YT=RR: Quote, Profile, Research) was down 1-18/32 to yield 4.49 percent, compared with 4.39 percent on Wednesday.
REVALUATION JITTERS
While the revaluation of the Chinese yuan, 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 Fed has raised short-term rates.
"It was a token revaluation at 2.1 percent. But it's going to potentially create less demand on the long end," said another trader at a Wall Street Treasury dealer.
Some economists and a Treasury official were injecting a cautionary note, saying the revaluation would do little to alter China's appetite for U.S. debt.
Thursday's movements amounted to a widening spread between the yield on the two- and 10-year notes to 33 basis points from 28 basis points on Wednesday.
That spread had 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.
AND OH YES, SOLID DATA
The Philadelphia Fed said its index on factories in the mid-Atlantic region rose to positive 9.6, bouncing back from a negative 2.2 reading in June. In the survey, zero marks the threshold between growth and contraction.
Also, the U.S. government reported that weekly first-time jobless claims came in lower than expected in the week ended July 16, adding to views U.S. economic growth is robust.
"The bond market has plenty to worry about. It has Greenspan lecturing that low rates won't last, it has the Chinese yuan revaluation, and a low jobless claims number, so this adds modestly to an already bearish tone in the market," Avery Shenfeld, senior economist at CIBC World Markets in Toronto said following release of the Philadelphia Fed survey.
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