Why the decrease in China’s PMI means higher demand for Treasuries

Part 2
Why the decrease in China’s PMI means higher demand for Treasuries (Part 2 of 6)

Why China’s February PMI clocked its 4th consecutive decline

China’s PMI

The Purchasing Managers’ Index (or PMI) for China recorded its fourth straight month of decline in February 2014. The index recorded a value of 48.5 in February—down one point from January’s reading of 49.5. The below-50 reading implied that China’s manufacturing sector had contracted. As China has recently become the world’s largest trading nation (measured by exports and imports), with its trade in goods estimated at $3.87 trillion in 2012, a manufacturing slowdown in China is likely to have global repercussions.

Part 2Enlarge Graph

“I would not expect China to be the big boom that we’ve been used to,” said Doug Oberhelman, chairman and CEO of Caterpillar (CAT), the world’s largest construction and mining equipment manufacturer at a construction equipment show recently. Coca Cola (KO) reported slower sales growth in China last quarter, holding emerging markets partially responsible for the 8% decline in net income in Q4 2013.

China’s February PMI report was issued on March 3. On the same day, market yields on U.S. Treasury securities at 30-year and 10-year constant maturities declined by 6 basis points (or bps) and 4 bps, respectively.

The impact of China’s PMI report on Treasury yields and China’s latest manufacturing PMI release are likely to affect companies like Revlon (REV) as well as fixed income ETFs like TLH and TLT. Read on to Part 3 of this series to find out more.

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