China’s “yuan devaluation exports their deflation to other
countries,” Gross wrote in a tweet Tuesday. “Bullish for bonds.
Bearish for stocks.”
The difference between yields on U.S. 10-year notes and
similar-maturity Treasury Inflation Protected Securities, a
gauge of trader expectations for consumer prices over the life
of the debt, dropped to as little as 1.62 percentage points, the
least since March 17. The average for the past decade is 2.14.
A falling inflation rate is positive for bonds because it
enhances the value of their fixed payments.
Debt Sale
The impact on demand will be gauged at a $24 billion auction of
notes due in August 2025 on Wednesday that could see borrowing
costs drop to the lowest since April. The Treasury last sold
10-year debt on July 8 at a yield of 2.225 percent. The
securities due to be sold Wednesday yielded 2.11 percent in
pre-auction trading.
Fed policy makers have kept their main rate, the target for
overnight loans between banks, in a range of zero to 0.25
percent since 2008 to support the world’s biggest economy.
There’s a 42 percent chance the central bank will boost its
benchmark at its Sept. 16-17 meeting, based on the assumption
that the benchmark will average 0.375 percent following the
increase, data compiled by Bloomberg show. The odds are down
from 54 percent on Aug. 7.
With 30-year Treasury yields touching the lowest since April 29,
investors may be over discounting the chances of a rate
increase, according to John Bilton, JPMorgan Asset Management’s
head of global strategy.
“Term risk premia now, in the long end of the U.S., are
extremely compressed and that concerns me,” Bilton said in an
interview on Bloomberg Television’s “On the Move” with Jonathan
Ferro. “We could be ahead of a Fed rate hike, entering a time
when we need to rethink those duration longs.”