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Treasuries fall fears china pulls currency Original Source Link: (May no longer be active)
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U.S. Treasuries Fall on Speculation China to Reduce Purchases
July 21 (Bloomberg) -- Treasuries dropped after China let its currency strengthen, boosting speculation the country will reduce purchases of U.S. government debt. The yield on the benchmark 10-year note reached the highest since May.
China was the second-biggest holder of Treasuries with more than $243 billion at of the end of May, up from $165 billion a year earlier, according to the U.S. Treasury Department. Japan was the largest with $686 billion. China has been buying Treasuries to keep the yuan at a fixed rate against the dollar.
``This does mean a shift away from investing in U.S. assets, and yields will move higher,'' said Peter Hooper, chief U.S. economist at Deutsche Bank AG in New York, on a conference call. The firm is one of the 22 primary dealers of U.S. government securities that trade with the central bank's New York branch.
The yield on the 10-year note rose 12 basis points, or 0.12 percentage point, to 4.28 percent at 3:01 p.m. in New York, the highest since May 10. The price of the 4 1/8 percent note due in May 2015 fell almost 1 point, or $10 per $1,000 face amount, to 98 25/32, according to Cantor Fitzgerald LP.
``The timing was more of a surprise,'' said David Ader, head of U.S. government debt strategy at RBS Greenwich Capital Inc. in Greenwich, Connecticut. ``It's a headline event.'' RBS is also a primary dealer.
Basket of Currencies
The new rate strengthens the yuan by 2.1 percent to 8.11 per U.S. dollar immediately, the People's Bank of China said on its Web site. The central bank said it will allow the yuan to fluctuate versus an unspecified basket of currencies, which will permit it to rise or fall as the dollar gains or drops against other currencies.
``Adjusting the yuan exchange rate will enhance the independence and efficiency of monetary policy and help bring imports and exports into balance,'' the central bank said in a statement in Chinese on its Web site.
The yuan had been pegged at about 8.3 per dollar, prompting criticism from U.S., German and Japanese government officials that an undervalued yuan gave China an unfair trade advantage.
The revaluation permits China to begin diversifying its foreign-exchange reserves out of dollar-denominated assets and may serve as a ``signal for other Asian central banks'' to follow suit, hurting Treasuries, wrote Stephen Roach, chief global economist in New York at Morgan Stanley, in a report.
U.S. Treasury Secretary John Snow said in an interview he isn't concerned that China will reduce its demand for U.S. government debt.
`Flat-Footed'
News of the revaluation reached traders at about 7 a.m. New York time as many were just settling in.
``It caught the market flat-footed,'' said Gregg Cohen, a government bond trader in New York at Cantor Fitzgerald LP. ``I was drinking my coffee, looked up and the market was falling out of bed.''
The drop in Treasuries prices were limited earlier after reports of an attempted bombing in London, two weeks after the worst attack on the capital since World War II. Treasury losses may also be curbed by speculation the revaluation will do little to curb China's economic growth.
``China is still a major producer, they are still going to sell a lot of goods, take in a lot of dollars and buy Treasuries,'' said Scott Gewirtz, head of Treasury note and bond trading in New York at Lehman Brothers Holdings Inc., which is also a primary dealer.
`Firm Footing'
Federal Reserve Chairman Alan Greenspan said yesterday that that the economy is ``on a firm footing'' while inflation is tame, causing Treasuries to rally for a second day. Inflation erodes the value of a bond's fixed payments.
``I'm buying Treasuries this morning,'' said Michael Cheah, who manages $2 billion in bonds for AIG SunAmerica in Jersey City, New Jersey. China's revaluation will help the Treasury market as it buys more government debt to support ``the upper end'' of the new yuan band, he said.
Greenspan gave his semi-annual testimony on the economy to the House Financial Services Committee. He testified today to the Senate Banking Committee.
The Conference Board said its index of leading U.S. economic indicators gained 0.9 percent last month, from a 0.5 percent decline in May. The Conference Board recalibrated its index to reduce false warnings about economic slowdowns.
The Philadelphia Fed reported today that its regional factory index rose to 9.6 in July from minus 2.2 last month. Manufacturing growth in the region contracted in June for the first time in two years as energy costs rose. Readings greater than zero signal growth.
The Treasury Department said it will auction $6 billion in 19-year and six month inflation indexed notes, or TIPS, on July 26.
Fed policy makers won't use monetary policy to deflate what some economists say is a ``bubble' in the U.S. housing market, according to the minutes of the central bank's June 29-30 meeting, which were released today.
Last Updated: July 21, 2005 15:03 EDT
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