From Newsmax

Bill Gross said deflation will wash up on other shores after China devalued its currency, sending investors into Treasurys.

“The weak Chinese economy seems to require a competitive devaluation against other Asian producers which points to weak global growth, lower commodity prices and again, lower inflation worldwide,” Gross, money manager at Janus Capital Group Inc., wrote in an e-mailed response to questions after the People’s Bank of China cut the yuan’s reference rate by the most in two decades to combat an export slump. ‘The disinflationary/deflationary effect will keep 10- and 30-year Treasurys well bid.’’

Treasury yields have stayed close to historical lows as global fragility limits offsets a strengthening U.S. economy. U.S debt surged Tuesday as stocks and commodities plunged worldwide, while a market measure of U.S. inflation expectations fell to the lowest in almost five months.

Investors are betting China’s move may make it harder for the Federal Reserve to raise U.S. interest rates and achieve its 2 percent inflation target.

Yield Drop

Treasury 30-year yields, the most sensitive to the outlook for inflation, dropped to 2.81 percent Tuesday, the lowest since April 30. Forecasters have predicted the yield will rise to 3.22 percent by year-end.

Analysts estimate the benchmark Treasury 10-year yield will climb to 2.60 percent by December. It dropped to 2.14 percent Tuesday, the lowest since May 29.

The difference between yields on 10-year Treasury Inflation Protected Securities and equivalent nominal yields, a measure of inflation expectations, shows investors expect U.S. prices to rise by 1.63 percent a year for the coming decade. That’s the lowest level since March.

“Yuan devaluation exports their deflation to other countries,” Gross wrote in a tweet Tuesday. “Bullish for bonds. Bearish for stocks.”

A drop in the price of goods and services is good for bonds because it enhances the value of a debt’s fixed payments.

“Devaluation of the Chinese yuan is a way for the U.S. to import deflation from China,” said Guy LeBas, chief fixed-income strategist at Janney Montgomery Scott LLC in Philadelphia, which manages $61 billion in assets. LeBas said the U.S. job market is strong and inflation is stable, which “gives the Fed permission to hike rates — just not very high.”

Traders are pricing in a 46 percent chance the Fed will raise borrowing costs for the first time since 2006 at its September policy meeting, based on the assumption that the benchmark rate will average 0.375 percent following the increase, data compiled by Bloomberg show. That’s down from 54 percent on Aug. 7.

“I don’t believe this will keep our own Fed from raising” rates in September, Gross wrote in the e-mail.

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