Bond Report: Treasury yields post biggest daily drop since August amid worries of potential spillover from China’s Evergrande


U.S. Treasury yields on Monday posted their biggest one-day drops since August as the potential collapse of a Chinese property development company rattled investors, raising the prospect of a spillover into other global markets.

The rally in government debt came as the Dow Jones Industrial Average skidded more than 900 points amid a global stock selloff. Meanwhile, investors are also getting ready for a two-day gathering of the rate-setting Federal Open Market Committee starting on Sept. 21.

What Treasury yields are doing
  • The 10-year Treasury note yields

    1.308%, compared with 1.369% on Friday at 3 p.m. Eastern Time. Yields and debt prices move in opposite directions.
  • The 30-year Treasury bond rate

    was at 1.847%, versus 1.909% at the end of last week.
  • The 2-year Treasury note yields

    0.214%, compared with 0.224% on Friday.
  • It was the biggest one-day drop for the 10- and 30-year rates since Aug. 13, and largest daily decline for the 2-year yield since Aug. 30, based on 3 p.m. levels, according to Dow Jones Market Data.
What’s driving the market?

Monday’s downturn in the global investing mood was being blamed on a teetering Chinese property company, Evergrande Group, which is China’s second-largest property developer and is said to have some $300 billion in debt that some fear could have implications for other markets throughout the globe.

Evergrande is seen in danger of missing interest payments on debt this week and next. Failure to make the payments within 30 days would put the property developer in default, according to news reports.

Read: Why Evergrande has suddenly exploded into a potential global financial market crisis

Markets in much of Asia were closed on Monday, including mainland China, for holidays, but Hong Kong’s Hang Seng, which was open and lists a number of Chinese companies, dropped more thank 3%.

Evergrande is part of a heavily leveraged real-estate sector that makes up more than 28% of China’s economy, according to the Financial Times, and government officials in Beijing have suggested that they wouldn’t step in to save the troubled company.

See: Evergrande fears sink stock market: Here’s what investors need to know about what happens next

Reuters recently reported that the editor of the China state-backed Global Times newspaper had warned that Evergrande shouldn’t assume it’s “too big to fail.”

Some analysts are expecting that the Chinese government will intervene to stem the worst impacts if Evergrande collapses, and say the company’s potential debt blowup is ‘not a contagion’ event for the stock market. Other commenters are comparing the scenario facing Evergrande to the collapse of Lehman Brothers back in the fall of 2008, which had helped to amplify a global debt crisis that was already under way.

The downfall of the property developer could intensify concerns about the recovery of China’s economy from the pandemic, raising the possibility of a fresh slowdown in the country.

Against that backdrop, the Dow Jones Industrial Average
the S&P 500 index

and the Nasdaq Composite Index

dropped sharply on Monday. The Dow fell more than 900 points and headed for its worst day in 10 months.

The action in China comes as the Fed’s two-day policy meeting, which begins this Tuesday, has investors on edge about the prospects of the removal of market-supportive accommodation.

Read: Evergrande isn’t the only reason the stock market is headed for its worst day in 2 months. Here are 7 other reasons.

On top of that, anxieties about the U.S.’s ability to increase its debt ceiling also added to concerns about weakness in the market that is amplified by seasonal factors, helping support a flight to the perceived safety of government debt.

On the public health front Monday, Pfizer Inc.

and German partner BioNTech SE announced positive results in a Phase 2/3 trial of their COVID-19 vaccine in children aged 5 to 11, and said the vaccine was safe, well-tolerated and produced “robust” neutralizing antibody response.

What analysts are saying
  • “Evergrande shares plunge as much as 19% in Hong Kong, to hit the lowest since June 2010. This caused a ‘flight-to-quality’ in Treasurys resulting in a flatter curve,” managing director Tom di Galoma of Seaport Global Holdings wrote in a daily note.
  • As Fed officials convene in Washington this week, “the situation in China only adds to the list of factors advocating for more patience from monetary policy makers as greater clarity is gained and the broader market impact comes into sharper relief,” strategist Ian Lyngen of BMO Capital Markets wrote in a note.

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