The China equity market ructions created volatility across global markets and the bond market was no exception. The surprise decision to devalue the yuan created major equity market weakness with the major view that China devalued the yuan to improve exports and invigorate its local economy. Markets saw that in two ways: stimulus would continue and this was good for asset prices; and, China was set to export more deflation to the rest of the world in the form of lower prices which was bad for other central banks that are attempting to re-inflate their economies.
The People’s Bank of China stepped in afterwards to try and soothe markets by cutting rates and reducing reserve requirements for banks. It also attempted to outlaw short selling of equities and as the month closed was prosecuting journalists and stockbrokers for ‘scaring’ markets. In the face of all this, bonds initially rallied sharply before moving back higher towards month end. The picture for the US Fed to raise rates in September became cloudier as the market ascribed to the view that the Fed would now wait until December before raising rates.
The result was a mixed bag for global 10y bonds. US bonds rose 3bps to 2.22%, German bonds followed suit rising 13bps to 0.77% and French bonds rose 7bps to 1.09%. Australian bonds fell along with Japanese bonds (down 3bps to 0.38%) and UK bonds (down 5bps to 1.85%).