U.S. Treasury bonds pulled back after a three-day price rally as signs of progress in Greece's debt talks eased investors' anxiety, driven by a deepening rout in China's stock markets.
The cash-strapped country formally requested a three-year bailout from the eurozone's rescue fund Wednesday and pledged to start implementing some of the reforms demanded by its creditors. The news boosted European stocks and encouraged some investors to take some chips off the haven bond market.
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Looming new debt supply is also weighing down bond prices. A sale of $21 billion in 10-year Treasury notes is due at 1 p.m. EDT Wednesday, followed by the 2 p.m. EDT release of the Federal Reserve's minutes for its June monetary-policy meeting.
In recent trading, the yield on the benchmark 10-year Treasury note was 2.242%, compared with 2.231% on Tuesday, according to Tradeweb. Bond yields fall as prices rise.
Bond yields have dropped this month after the biggest rise in two years during the second quarter. Greece's debt crisis and a rout in China's stock markets after a recent strong bull run have driven investors to cut risks and preserve capital in ultrasafe U.S. government debt. The global uncertainties are muddling the global growth outlook and complicating the Fed's plan in raising short-term interest rates some time before the end of the year.
The 10-year Treasury yield had dropped to 2.178% during earlier global trade, the lowest intraday level since June 1.
A weekslong selloff in China's stock markets escalated even as policy makers in the world's second-largest economy have taken measures aiming to boost confidence. Shares listed on the country's main Shanghai market dropped 5.9% Wednesday, deepening a slump that has seen it fall by nearly a third since mid-June.
"There are concerns that the selloff in China's stock markets will start to impact Chinese economic growth, and therefore global growth," said Anthony Cronin, a Treasury bond trader at Societe Generale SA. "I think it's too early to say either China or Greece will derail U.S. growth. But as long as they are on investor's worry list, it's likely to cause the Fed to err on the side of caution when it comes to raising rates."
The gloom in China's stock markets has started to spread to other markets. Many commodities--crude oil, copper and iron ore--have sold off this month, reflecting concerns over soft demand driven by a slowing China's economy. Currencies in commodities-exporting countries have lost ground against the U.S. dollar.
Analysts and money managers say if China's economy stumbles, it could undercut the U.S. economic growth momentum and push the Fed to delay a rise in interest rates, a case that could send Treasury bond yields toward 2%, or even drop below that.
The International Monetary Fund on Tuesday reiterated its call for the Fed to delay raising interest rates until 2016. The Fed risks stalling the U.S. economy by raising interest rates too early, the IMF said.