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Bonds Rally With Yen on Fed as Greece Sinks Stocks

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Treasuries rallied with German bunds and the yen after the Federal Reserve cut its outlook for interest rates and warned of spillover if Greece debt talks fail. New Zealand’s dollar slid, while Chinese and European stocks fell.

Yields on 10-year U.S. notes fell four basis points to 2.28 percent by 8:13 a.m. in London, with rates on German, U.K. and Japanese debt also down. The yen rallied 0.3 percent versus the greenback. The Shanghai Composite Index plunged 3.7 percent. The Stoxx Europe 600 Index slid 0.5 percent and futures on the Standard & Poor’s 500 Index were little changed. The kiwi sank more than 1 percent after weaker-than-estimated growth data.

The Fed kept its forecast for rates to begin rising this year and reduced its projection for where they’ll be by the end of 2016. Euro-area finance ministers meet amid a continued deadlock over aid for Greece. Chinese stocks fell as a rash of initial public offerings ties up an estimated $1 trillion of funds, sending money-market rates surging.

Fed Chair Janet Yellen “successfully signaled that they’re going to tighten soon but markets have reacted very calmly,” said Richard Yetsenga, head of global markets research at Australia & New Zealand Banking Group Ltd. in a Bloomberg Television interview. “The major economies as a group actually look OK, but it’s in Asia probably where we’ve got some vulnerabilities.”

‘Gradual’ Tightening

New forecasts issued by the Fed Open Market Committee implied two 25 basis-point rate increases this year but a shallower pace of advance next year. Speaking after the statement’s release, Yellen stressed that the date of liftoff is less important than the trajectory of gains.

Futures traders put the chance of an increase in September at 46.5 percent after the statement, down from 49.8 percent Wednesday afternoon New York time. The probability that rates will be higher in December is 77 percent, according to data compiled by Bloomberg.

The price of the 2.125 percent U.S. note due May 2025 rose 9/32, or $2.81 per $1,000 face amount, to 98 19/32. The last time the yield was so low was June 3.

The yen led gains among Group of 10 peers Thursday, as the euro held recent gains. Yellen warned of a spillover to the U.S. if a resolution isn’t reached on freeing up funds for Greece, where Prime Minister Alexis Tsipras vowed to reject an unfair deal from creditors.

Contagion Warning

Officials from the Netherlands to Portugal are anticipating a breakdown in discussions, with Ireland making contingency plans for a Greek default or ejection from the euro, a person with knowledge of the matter said.

German notes due in a decade paid 0.76 percent, four basis points lower than yesterday. The rate on 10-year gilts fell seven basis points in early trade, while yields on similar French notes also retreated.

Rates on 10-year Japanese notes dropped four basis points to 0.44 percent. The highest accepted yield at a sale of 40-year government notes was 1.59 percent, lower than the 1.600 estimated in Bloomberg survey of 13 primary dealers.

The kiwi slumped to as low as 68.81 U.S. cents, close to its weakest level since 2010. Gross domestic product in the South Pacific nation grew 0.2 percent in the first quarter, data Thursday showed, down from 0.7 percent in the last three months of 2014 and trailing the 0.6 percent increase projected by economists.

Yields Slip

All 19 groups on the Stoxx 600 retreated Thursday. The measure has retreated about 4.5 percent this month amid wrangling over Greece’s bailout and as a stronger euro dented export prospects.

The Shanghai Composite has retreated 7.4 percent since Friday, heading for the biggest weekly retreat for the gauge since 2009. China’s benchmark money-market rate rose to an eight-week high after the central bank decided against rolling over some medium-term loans.

IPOs this week will lure about 6.7 trillion yuan ($1.1 trillion) of bids, according to a Bloomberg survey of forecasters. The ChiNext index of smaller companies sank 6.3 percent, paring its gain this year to 138 percent.

New-home prices fell in 41 of the 70 Chinese cities tracked by the government from a month earlier, the National Bureau of Statistics said Thursday, compared with declines in 47 in April. Prices rose in 20 cities and were unchanged in nine.

Hong Kong stocks retreated after the city’s legislature voted down a Beijing-backed electoral reform package.

Commodities Slip

Copper for three-month delivery added 0.7 percent in London, while nickel rose 0.7 percent to $12,840 a metric ton, for a second day of gains. Zinc and lead advanced at least 0.5 percent. China is the biggest consumer of industrial metals.

West Texas Intermediate crude dropped to $59.37 a barrel after ending last session little changed.While inventories shrank by 2.68 million barrels last week, supplies are still 89 million above the five-year average for this time of the year, according to the Energy Information Administration. Brent crude lost 0.4 percent to $63.58 a barrel.

Gold climbed 0.3 percent to $1,188.70 an ounce, after rallying 0.3 percent on the Fed statement.

(Source: Bloomberg)