August 12, 2015 / 8:54 PM / 2 years ago

TREASURIES-U.S. debt rally fizzles as Wall St steadies

* Long-dated Treasuries turn down

* Ten-year notes auction disappoints

* Traders pull back bets on Sept Fed rate hike (Adds market shift, auction results, quotes)

By Michael Connor

NEW YORK, Aug 12 (Reuters) - Long-dated U.S. Treasury debt prices fell late on Wednesday, surrendering gains from a safety-bid rally ignited by China allowing its currency to decline, while Wall Street bounced back from sharp losses.

Treasuries, including benchmark 10-year notes whose yields brushed three-month lows early on Wednesday, softened in price after a lackluster auction of $24 billion of 10-year notes by the government.

The poorly bid sale, the second leg of this week’s $64 billion quarterly refunding, came as investors piled into low-risk government debt in the wake of China’s surprise devaluation of its currency.

China’s unexpected actions, including allowing the yuan to weaken further on Wednesday, fueled fears of currency wars, knocked down stock markets and encouraged buying of top-quality government debt. Yields on 2-year German debt went to a new low of minus 0.29 percent.

Demand for U.S. Treasuries waned as Wall Street rebounded to close flat after falling more than 1 percent and traders prepared for auctions, according to Larry Milstein, head of U.S. government and agency trading at R.W. Pressprich & Co. in New York.

“There is a little bit of a supply issue and the reversal of the risk-off trend of the last few days,” Milstein said.

Prices for the 10-year note were last off 3/32 and yielding 2.1498 percent.

Thirty-year Treasuries, a maturity the government will auction on Thursday, was last off 20/32 and yielding 2.8382 percent.

Shorter maturities were mixed and little changed in price.

Analysts said the possible effect on the world economy from China’s economic struggles, including a big drop in exports, may delay interest rate hikes by Federal Reserve policymakers.

Short-term U.S. interest rates markets signaled traders see no more than a 40 percent chance the U.S. central bank would raise rates at its Sept. 16-17 meeting. That compares to Friday, after a solid July jobs report, when traders had priced in just above a 50 percent probability.

“China’s move has raised more questions than answers about the shape of the global economy, so markets see that as detracting from a Fed rate hike in September,” said Joe Manimbo, senior market analyst at Western Union Business Solutions in Washington. (Additional Reporting By Richard Leong and Sam Forgione in New York; Editing by Meredith Mazzilli and Diane Craft)

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