Treasury Yields Surge in Rattled Bond Market
China’s decision to revalue its currency triggered a sharp sell-off in Treasury bonds Thursday, while the stock market ended mostly lower amid uncertainty over the Chinese shift and concern over apparent attempted bombings in London.
Although many analysts said it was too early to know how far China would go in allowing its currency to rise -- or what it ultimately would mean for global markets -- some investors made snap judgments about potential winners and losers.
Shares of some mining firms rallied as buyers bet that a stronger currency would give China a bigger appetite for raw materials, most of which are priced in dollars on world markets. Rio Tinto, a major global mining company, rose $1.01 to $130.68.
Retail stocks, by contrast, ended the day mostly lower on worries that they would face rising prices on the countless Chinese-manufactured goods that stock U.S. store shelves. A stronger Chinese yuan means $1 buys fewer of anything priced in yuan.
Target tumbled $1.75 to $58.23, Federated Department Stores slid $1.91 to $74.95, and Wal-Mart Stores lost 61 cents to $49.39.
Overall, falling shares outnumbered winners by 2 to 1 on the New York Stock Exchange in active trading. The Dow Jones industrial average dropped 61.38 points, or 0.6%, to 10,627.77.
But analysts said four explosions in London’s mass transit system Thursday, which may have been botched bombings, contributed to the downbeat mood in the stock market. The explosions came two weeks after the London bombings that claimed more than 50 lives.
In the bond market, Thursday’s trading seemed more directly tied to China’s move.
Investors sold Treasuries in part on worries that Chinese demand for U.S. bonds could wane as the Asian economic giant allowed its currency to rise against the dollar. In making the shift, China is expected to invest more of its export earnings in non-dollar-denominated bonds, such as European issues, over time.
“The thought is that there will be less demand for U.S. Treasury securities,” said Sam Stovall, investment strategist at Standard & Poor’s in New York.
That fear triggered selling of Treasuries, in turn driving yields higher. The bellwether 10-year T-note yield surged to 4.27%, up from 4.16% on Wednesday and the highest since April 21.
Shorter-term yields also rose. The 2-year T-note ended at 3.93%, up from 3.87% on Wednesday and a four-year high.
China held $243.5 billion of U.S. Treasury securities at the end of May, making it the second-largest investor in U.S. bonds, after Japan.
Inflation jitters also hurt bonds Thursday: If prices of Chinese exports increase because of the stronger yuan, the result could be higher U.S. inflation rates, also putting upward pressure on interest rates.
Concern about a possible rise in mortgage rates spurred selling of home builders’ shares. KB Home lost $2.40 to $82; Centex slid $3.14 to $76.36.
Still, some bond market pros said they doubted that Thursday’s reaction marked the beginning of a sustained surge in yields. They said other investors were likely to step in quickly to buy Treasury securities as interest rates rose.
“Recent history shows every time we have a spike up in yields, it doesn’t last,” said Gary Pollack, head of fixed-income research and trading at Deutsche Bank Private Wealth Management in New York.
Analysts also said that it wouldn’t be in China’s interest for Treasury securities to suddenly plunge in value, because that would devalue the bonds China already owns.
As for the stock market, experts noted that China’s initial move to boost the yuan’s value was modest: a 2.1% upward revaluation against the dollar, after nearly a decade of holding the yuan steady.
“What the stock market is trying to figure out is whether this is the first of many steps by China,” said Liz Ann Sonders, chief investment strategist at Charles Schwab Corp. in New York.
Even if the yuan is heading higher over time, the winners and losers from such a shift aren’t clear, Sonders and other analysts said.
If retailers such as Wal-Mart were able to pressure suppliers to keep a lid on costs in spite of the stronger yuan, for example, the inflationary effect might be muted, Sonders said.
And if the move cools the Chinese economy by slowing exports, it also might reduce demand for oil in that country, providing relief from elevated energy costs in the U.S. and elsewhere.
Near-term oil futures in New York fell 89 cents to $57.13 a barrel Thursday, the lowest since June 30.
Donald Straszheim, an economist and head of Straszheim Global Advisors in Santa Monica, said many U.S. companies could win and lose if the yuan rises.
Computer giant Dell Inc., for example, sells its products in China, which means it benefits as it translates profit in yuan into more dollars. But Dell also could be hurt if prices it pays for Chinese-produced parts were to rise, Straszheim said.
In the near term, China’s move could provide investors with an excuse to take profits after the market’s recent run-up, S&P;’s Stovall said.
Both the S&P; 500 and the Nasdaq composite had hit four-year highs Wednesday. On Thursday, the S&P; lost 8.16 points, or 0.7%, to 1,227.04, while the Nasdaq index fell 9.97 points, or 0.5%, to 2,178.60.
An index of smaller stocks, which hit record highs in recent days, fell more sharply than blue-chip indexes.
Most European stock markets were little changed in the face of China’s shift and the London explosions. Britain’s FTSE-100 index added 0.1% to 5,221.60.
In trading early today, the yuan revaluation triggered a rally in currencies of other Asian nations, including South Korea and Singapore. Stock markets in the region were mixed.
The dollar stabilized in Asian trading after falling sharply in New York. The dollar ended at 110.08 yen in New York, down from 113.06 on Wednesday.
One group of stocks got a big lift Thursday: U.S.-traded shares of Chinese firms. They could benefit from greater purchasing power if the yuan continues to rise. Oil giant Petrochina soared $5.01 to $82.90 on the NYSE. Other winners included Jilin Chemical, up $1.59 to $23.60, and Yanzhou Coal, up $3.55 to $71.20.
Times staff writer Tom Petruno contributed to this report.
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Whom we owe
China now ranks second among the 10 largest foreign holders of U.S. Treasury securities.
*--* Treasury holdings Investor (In billions) Japan $685.7 Mainland 243.5 China Britain 132.5 Caribbean 125.9 banking centers Taiwan 70.9 OPEC 62.6 Germany 61.2 South Korea 58.7 Hong Kong 47.6 Luxembourg 44.6
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Source: Treasury Department
