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Business News/ Market / Stock-market-news/  US treasuries rise as yuan devaluation sparks Fed-delay speculation
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US treasuries rise as yuan devaluation sparks Fed-delay speculation

China's yuan devaluation announcement also boosted demand for dollar-denominated assets

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Treasuries rose as China’s devaluation of the yuan stoked speculation a slowdown in Asian economies may prompt the Federal Reserve to delay raising interest rates.

US government securities also rallied as China’s announcement boosted demand for dollar-denominated assets. The People’s Bank of China cut the yuan’s daily reference rate by the most in two decades to combat a slump in exports, sending shockwaves through global markets.

“Since I woke up, I’m just trying to sift through all the information," said Craig Collins, managing director of rates trading at Bank of Montreal in London. “Does this put the Fed on hold? I don’t know. The US is paying attention to what’s going on in Europe and Asia and it does influence, to a degree, the growth prospects for the US."

Ten-year US note yields fell four basis points, or 0.04 percentage point, to 2.19 percent as of 9:52 a.m. London time, according to Bloomberg Bond Trader data. The price of the 2.125 percent security due May 2025 climbed 12/32, or $3.75 per $1,000 face amount, to 99 15/32.

The securities will struggle to break through their Aug. 7 high of 99 22/32 before U.S. markets open, according to BMO’s Collins.

The spread between yields on two- and 30-year Treasuries—known as the yield curve—will widen “if the market begins thinking this packs enough punch that it’s going to delay interest rates hikes into 2016," he said.

US two-year yields, among the most sensitive to interest rates, declined two basis points to 0.71 percent.

That delay is exactly what Hideo Shimomura, the chief fund investor at Tokyo-based Mitsubishi UFJ Kokusai Asset Management Co., thinks will happen after China’s devaluation.

“It’s a game changer," he said. “If the Fed starts to hike rates in September, it will bring stress to the markets."

Policy makers have kept the US benchmark interest rate near zero since 2008 to support the world’s largest economy.

There’s now a 50 percent chance the Fed will raise borrowing costs at its Sept. 16-17 meeting, down from 54 percent on Aug. 7, based on the assumption that the benchmark rate will average 0.375 percent following the increase, data compiled by Bloomberg show.

The odds of the rate being lifted further by March slipped to 35 percent, from 37 percent at the end of last week. Bloomberg

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Published: 11 Aug 2015, 02:54 PM IST
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