Thursday, July 21, 2005

China Revalues Their Currency

Today’s big news was that the Chinese have finally decided to un-peg the Yaun from the US dollar. This decision could have implications for the US housing market as seen in the drop in price in longer dated US debt. In short, many believe that the Chinese will limit their purchases of US 10 year and 30 year treasuries, which will cause the prices on these bonds to fall and the yields to rise. In turn this will cause US mortgage rates to increase because the rate that banks charged is typically at a spread to the 10 year note.


“The renewed selling pushed yields on benchmark U.S. 10-year Treasury notes pushed above a key barrier at 4.25 percent that traders had repeatedly tested in recent sessions.

"That bid has dissipated," a bond trader at a Wall Street dealer said about the London-related buying. "There's still selling related to the yuan revaluation. In the long run, there'll probably be less Asian buying of Treasuries," he added explaining the market's concerns about China's move.

Just after 11 a.m. (1500 GMT), the 10-year note was 26/32 lower and yielding 4.26 percent, after ending the day on Wednesday at 4.16 percent. Technically speaking, chart watchers say that while an intra-day break above an important level like 4.25 percent does draw in more sellers, a close above that level would have more longer-term significance.”



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