Treasuries Move Sharply Higher On Chinese Currency Devaluation

(RTTNews) - With traders reacting to news out of China, treasuries moved sharply higher over the course of the trading day on Tuesday.

Bond prices showed a strong move to the upside in morning trading before moving roughly sideways in the afternoon. Subsequently, the yield on the benchmark ten-year note, which moves opposite of its price, tumbled by 10.1 basis points to 2.137 percent.

The substantial decrease on the day pulled the ten-year yield down to its lowest closing level in over two months.

The rally by treasuries came in reaction to news of the People's Bank of China's surprise move to devalue its currency.

The bank set the value of the currency, known as the yuan or renminbi, at 6.2298 versus the U.S. dollar, 1.85 percent lower than Monday's official fixing rate.

The move raised concerns about the Chinese economy as well as the possibility that it could start a currency war.

Julian Jessop, Chief Global Economist at Capital Economics, said, "Today's reduction in the daily reference rate for the renminbi has been widely interpreted as the first of many moves whose main purpose is to regain competiveness by devaluing the Chinese currency."

"This has prompted talk of a fresh round of global 'currency wars,' additional monetary easing elsewhere, and even speculation that the Fed will be slower to raise U.S. interest rates," he added. "However, we are skeptical that the PBOC's announcement is truly a game-changer."

On the U.S. economic front, the Labor Department released a report showing that labor productivity rebounded in the second quarter, although the pace of growth fell short of economist estimates.

The report said labor productivity climbed by 1.3 percent in the second quarter following a revised 1.1 percent decrease in the first quarter. Economists had expected productivity to jump by 1.6 percent.

The Labor Department also said unit labor costs rose by 0.5 percent in the second quarter after surging up by 2.3 percent in the first quarter. The increase in costs matched economist estimates.

Meanwhile, the Treasury Department sold $24 billion worth of three-year notes, attracting slightly above average demand.

The three-year note auction drew a high yield of 1.013 percent and a bid-to-cover ratio of 3.34, while the ten previous three-year note auctions had an average bid-to-cover ratio of 3.29.

The bid-to-cover ratio is a measure of demand that indicates the amount of bids for each dollar worth of securities being sold.

Looking ahead, the Treasury is due to sell $24 billion worth of ten-year notes on Wednesday and $16 billion worth of thirty-year bonds on Thursday.