Treasury prices surged Monday, sending yields lower, as investors sought havens after China allowed its currency to weaken below a closely watched level, marking an intensification of the U.S.-China trade war.
The yield on the benchmark 10-year U.S. Treasury note TMUBMUSD10Y, -6.13% fell dropped 11.3. basis points to 1.742%. The 2-year Treasury yield TMUBMUSD02Y, -7.73% fell 13.25 basis points to 1.581%, while the 30-year Treasury bond yield TMUBMUSD30Y, -3.73% dropped 9.3 basis points to 2.297%. Yields move in the opposite direction of debt prices.
The yuan traded recently at 7.099 to the dollar in offshore trade USDCNH, +1.7659%, after breaching the 7 level — long referred to by market watchers as a “line in the sand.”The Wall Street Journal citing data from Refinitiv, said the yuan fell as much as 1.9% to a record offshore low of 7.1087 in Hong Kong on Monday. In mainland trade USDCNY, +1.5922%, the yuan traded at more than 7 per dollar for the first time since 2008.
Read: What a falling Chinese yuan means for the stock market and the trade war
Global equities slumped, with Wall Street extending losses over the course of the session. The Dow Jones Industrial Average DJIA, -3.47% dropped nearly 900 points as major indexes slumped more than 3% across the board. Investors flooded into haven assets, including government bonds, the Japanese yen USDJPY, -0.55% and gold GC00, +1.49% .
“The most unusual reaction however was in the Treasury market, where 10-year yields fell around 7 [basis points]. That’s incredible for a Monday morning in Asia, when the Treasury market is usually quietly waiting for some lead from the U.S.,” wrote Marshall Gittler, chief strategist at ACLS Global, in a note.
The yuan’s move brought back memories of previous bouts of yuan weakness, including the 2015 devaluation, which triggered volatility across global markets. But Ian Lyngen, head of U.S. rates strategy at BMO Capital, said investors might look back to the early days of the U.S.-China trade fight last summer, when the yuan went from 6.4 to the dollar in mid-June to 6.93 in mid-August for a roughly 7.8% depreciation.
One of the lessons, he said, is that yuan adjustments tend to occur over several weeks or months.
“With this backdrop, it is very difficult to fade the strength in the Treasury market and we’re content to emphasize how well the price action conforms to the traditional seasonal patterns in U.S. rates. This points toward a move beyond 1.75% in 10s and we’ll be using the summer-2016 trading range as near-term parameters for the time being,” he wrote.
Excluding the extremes, which saw the 10-year yield briefly dip to 1.32%, the bulk of the trading during this period occurred between 1.45% and 1.75%; he said with “a significant volume bulge at 1.55% that we suspect will provide a bit of magnetism as August is now poised to be a particularly bullish month for the Treasury market.”
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