Safe-Haven Treasury Bond ETFs Rally on China's Evergrande Woes

Treasury bond exchange traded funds climbed on Monday with yields suffering their worst pullback since August amid a potential default of a Chinese property development company that could spill over to global markets.

On Monday, the Vanguard Intermediate-Term Treasury Index Fund ETF Shares (VGIT) was up 0.3% and the Vanguard Long-Term Treasury Index Fund ETF Shares (VGLT) rose 1.2%. Meanwhile, yields on benchmark 10-year Treasury notes fell to 1.309%, and yields on 30-year Treasuries dropped to 1.846%. Bond prices and yields have an inverse relationship.

Fears that property developer China Evergrande Group might default deepened a global equity selloff and sent investors to safe-haven assets, with Treasury bonds rallying. Meanwhile, Evergrande shares plunged to a more than 11-year low, adding to concerns about the health of China’s economy and its potential impact on global markets.

“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, according to MarketWatch.

Evergrande has been trying to raise funds to off its lenders, suppliers, and investors, with regulators warning that $305 billion of liabilities could spark broader risks to the financial system if not stabilized, Reuters reports.

However, some argued that the risks may have been overblown and the selling may have been overdone on Monday. Tom Simons, money market economist at Jefferies LLC., warned that many people outside of China are unfamiliar with the company’s problems.

“Evergrande, frankly, to me feels more like a topic of conservation than a salient market risk,” Simons told Reuters. “At the end of the day, China is not going to allow this to spiral out of control.”

Some observers anticipate that the Chinese government will prevent the worst impacts if Evergrande collapses and argue that the company’s potential debt blowup is “not a contagion” event for the stock market.

More cynical observers compared the scenario facing Evergrande to the collapse of Lehman Brothers back in the fall of 2008, which fueled a global debt crisis.

Meanwhile, as Federal Reserve officials meet 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 said in a note.

For more news, information, and strategy, visit the Fixed Income Channel.