Treasury yields fell sharply on Monday as risk aversion across markets caused investors to seek perceived havens and traders increased bets the Federal Reserve would not raise interest rates this week.
What’s happening
-
The yield on the 2-year Treasury
TMUBMUSD02Y,
3.757%
slipped by 15.9 basis points to 3.666%. Yields move in the opposite direction to prices. -
The yield on the 10-year Treasury
TMUBMUSD10Y,
3.350%
retreated 10.3 basis points to 3.327%. -
The yield on the 30-year Treasury
TMUBMUSD30Y,
3.588%
fell 5.9 basis points to 3.569%.
What’s driving markets
Lingering concerns about the health of the global banking system saw investors pile into sovereign bonds.
The sight of Credit Suisse’s AT1 bond holders having their $17 billion investment wiped out as part of the bank’s takeover by UBS was adding to the attraction of government paper.
These bonds, also called contingent convertible bonds or CoCos, have been a key funding source for European banks.
U.S. 2-year Treasury yields, which are particularly sensitive to Federal Reserve policy, dropped to a six-month low as traders added to bets that turmoil in the financial sector — and the economic damage that may do — means the central bank will not raise borrowing costs at the conclusion of its policy meeting on Wednesday,
Markets are pricing in a 50.1% probability that the Fed will leave interest rates at a range of 4.50% to 4.75% after its meeting on March 22nd, according to the CME FedWatch tool.
The central bank is expected to take its fed funds rate target to 4.74% by May 2023, according to 30-day fed funds futures.
Just a few weeks ago, before the U.S. bank SVB Financial collapsed, the market forecast the Fed’s so-called terminal rates at more that 5.6% in the autumn. The Fed has begun expanding its balance sheet again to help boost liquidity in the market.
Sovereigns were bought across the board, The German 10-year bund yield
TMBMKDE-10Y,
fell 16.8 basis points to 1.943%, the lowest this year, while French peers
TMBMKFR-10Y,
slipped 14.5 basis points to 2.550%.
What are analysts saying
“The Fed’s quantitative tightening (QT) was clearly out of the window since the Silicon Valley Bank (SVB) debacle. The Fed’s balance sheet ticked higher last week, to help easing stress across banks,” said Ipek Ozkardeskaya, senior analyst at Swissquote Bank.
U.S. banks borrowed almost $165 billion from the Federal Reserve last week after the failure of Silicon Valley Bank, the central bank said. After the Fed made $143 billion available to SVB and the failed Signature Bank, the Fed’s balance sheet rose by $297 billion to $8.64 trillion.
“But the QT and last week’s emergency intervention are conceptionally different. And more interestingly, while we could think that the reverse-QT, could have some negative implications for inflation – because the Fed is adding liquidity into the system – an index on financial conditions in the U.S. suggests that the financial conditions have tightened sharply since last week, to the tightest levels since last fall and that could be an argument for the Fed to pause its rate hikes, ” Ozkardeskaya added.
