Thursday’s benign US inflation report came on the back of renewed concerns about the state of the Chinese economy. Chinese shares are down again this morning. Taken together, last week was the perfect opportunity for bonds to hold a bid.
But the Treasury market’s immediate response to the soft CPI data was muted. Treasuries sold off later in the day, in fact, after a weaker-than-expected 30-year auction. The US Treasury sold $23bn in long-dated bonds at a high yield of 4.189%, the highest since 2011. The amount allotted to primary dealers was the largest since February. Treasury auctions are taking over centre stage from the inflation releases.
China remains a risk. Homebuyers are delaying their purchases in the hope that prices will fall further, local governments will provide more subsidies, or that mortgage rates will decline. However, soft Chinese growth prospects may not be such a boost to US Treasuries, given the fiscal boom in the US and surging investment in neighbouring trade partners, such as Mexico.
