Forex Trading: Currency Briefing – Treasuries rise on persistent concerns for US/China recoveries
US Treasury bond prices turned north yesterday as concerns for the world’s two largest economies boosted the allure for safe-haven investments, inasmuch as government paper is still considered safe-haven.
In late afternoon trading in the United States, the benchmark 10-year note was 14/32 higher in price, yielding 2.7 percent. Investors snapped up bonds after data showed slower growth in US home prices and a drop in consumer confidence (78.1 in February from 79.4 the prior month).
“As long as inflation remains in check and the softening of the economy continues, there is only a limited risk in holding high-quality fixed-income securities like Treasuries,” observed Kevin Giddis, head of fixed income at Raymond James in Memphis, Tennessee. “This parking of funds in Treasuries will likely be with us until the economy breaks out hard one way or the other.”
There has been much debate on the impact of severe winter weather on the recent patch of anemic US economic data, covering the gamut from manufacturing and housing to employment. Many traders see the economic uncertainty keeping the 10-year yield within a range of 2.5 percent to 3.0 percent.
For the moment, the US Federal Reserve appears to be shrugging off the soft patch as a temporary phenomenon. The minutes of the FOMC’s January meeting showed broad support for a progressive reduction in bond buying by $10 billion per policy meeting this year. The Fed is currently buying $65 billion worth of bonds a month, down from $85 billion through last year.
Also boosting bond prices yesterday was a continuing decline in the Chinese currency, with a weakening yuan making it more costly for Chinese businesses to borrow dollars at a time when Chinese banks are throttling back on lending to the housing sector. After hitting a record against the dollar in mid-January, the People’s Currency (aka the renminbi) reached a six-month low on Tuesday.
“The risk is that if enough Chinese firms are denied access to credit, or pay more for credit, then growth in China will necessarily slow with repercussions world-wide undoubtedly,” believes Christopher Sullivan, who oversees a $2.25 billion fund as chief investment officer at the United Nations Federal Credit Union.
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Bond yields are expected to rise if data in the next couple of months indicate that the soft patch is indeed temporary. There is no shortage of investors still expecting the 10-year yield to trade above three percent later this year absent a clear faltering in the US recovery.
Nevertheless, the uncertain growth outlook has convinced many bond investors that the Fed is unlikely to raise short-term interest rates even after a conclusion of bond-buying by the end of this year.
This line of thinking boosted demand for a $32 billion sale of two-year notes on Tuesday. The new two-year notes were sold at a yield of 0.34 percent with a 3.6 bid-to-cover ratio, higher than the average of 3.48 observed for the past four sales. The highlight was the indirect bid, a proxy measure of demand from foreign investors, which at 34.3 percent was the highest since June.
The yield on the two-year Treasury note is among the most sensitive to changes in the Fed’s interest-rate policy expectations. The central bank has held its key short-term policy rate near zero since December 2008 and interest-rate futures linked to expectations for Fed rate policy indicate traders expecting the first rate increase in the second half of next year.
But with the longstanding unemployment rate threshold of 6.5 percent almost reached, the argument is now in play that the Fed should change its forward guidance and take a modest hit to its credibility.