Bond yields fell sharply on Monday as the failures of Silicon Valley Bank and Signature Bank had investors factoring in the chances of the Federal Reserve either pausing its rate-hike campaign or raising borrowing costs more slowly next week.
What happened
- The yield on the 2-year Treasury note
TMUBMUSD02Y,
3.924%
plunged 55.6 basis points to 4.03% as of 3 p.m. Eastern, its largest one-day drop since Oct. 20, 1987, according to Dow Jones Market Data, the day after the “Black Monday” stock-market crash. Yields move in the opposite direction to prices. - The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.464%
fell 17.9 basis points to 3.515% and logged its largest three-day decline since March 23, 2020. - The yield on the 30-year Treasury bond
TMUBMUSD30Y,
3.643%
retreated 3.4 basis points to 3.665%.
What drove markets
The monetary policy-sensitive 2-year Treasury yield plunged by more than a half-of-a-percentage point on Monday as investors fretted that spillover from the banking system — after the collapse of California’s Silicon Valley Bank
SIVB,
-60.41%
and New York’s Signature Bank
SBNY,
-22.87%
— would force the Federal Reserve to either halt or slow the pace of interest-rate increases on March 22.
The 2-year yield — which had been above 5%, or an almost 16-year high, just last week — dropped to as low as 3.976% before the U.S. stock market opened.
Markets are pricing in a 45% chance of no Fed rate hike on March 22 and a 55% probability that policy makers will raise rates by another 25 basis points to between 4.75% and 5%, according to the CME FedWatch tool. The chances of a 50 basis point hike are now seen at zero after rising to more than 70% early last week.
The central bank is mostly expected to lower its fed-funds rate target to 4.25% to 4.5% by July, which implies at least one rate cut will take place by then, according to 30-day Fed Funds futures.
As of Friday, the MOVE index, which measures expected volatility in the Treasury market, sat at 140, its highest level of the year.
What analysts are saying
“The Fed may now find itself between a rock and a hard place. It wants to tighten policy to keep a lid on inflation but will now face questions as to whether policy is already too tight, given this nasty wobble in the banking system and the pressure higher rates are already putting on many companies’ cash flows,” said Russ Mould, investment director at U.K.-based AJ Bell.
“If nothing else, this is a reminder that the Fed may not find it easy to extricate itself from more than a decade of record-low interest rates and $7 trillion of quantitative raising (around a quarter of U.S. GDP) without something breaking somewhere. Money was cheap and tossed around with abandon as a result of the zero cost associated with it. Now markets are going through a journey once more to discover what is the cost of money, some of that prior reckless abandon could lead to trouble,” Mould said.
See: Silicon Valley Bank is a reminder that ‘things tend to break’ when Fed hikes rates
Bond yields fell sharply on Monday as the failures of Silicon Valley Bank and Signature Bank had investors factoring in the chances of the Federal Reserve either pausing its rate-hike campaign or raising borrowing costs more slowly next week.
What happened
- The yield on the 2-year Treasury note
TMUBMUSD02Y,
3.924%
plunged 55.6 basis points to 4.03% as of 3 p.m. Eastern, its largest one-day drop since Oct. 20, 1987, according to Dow Jones Market Data, the day after the “Black Monday” stock-market crash. Yields move in the opposite direction to prices. - The yield on the 10-year Treasury note
TMUBMUSD10Y,
3.464%
fell 17.9 basis points to 3.515% and logged its largest three-day decline since March 23, 2020. - The yield on the 30-year Treasury bond
TMUBMUSD30Y,
3.643%
retreated 3.4 basis points to 3.665%.
What drove markets
The monetary policy-sensitive 2-year Treasury yield plunged by more than a half-of-a-percentage point on Monday as investors fretted that spillover from the banking system — after the collapse of California’s Silicon Valley Bank
SIVB,
-60.41%
and New York’s Signature Bank
SBNY,
-22.87%
— would force the Federal Reserve to either halt or slow the pace of interest-rate increases on March 22.
The 2-year yield — which had been above 5%, or an almost 16-year high, just last week — dropped to as low as 3.976% before the U.S. stock market opened.
Markets are pricing in a 45% chance of no Fed rate hike on March 22 and a 55% probability that policy makers will raise rates by another 25 basis points to between 4.75% and 5%, according to the CME FedWatch tool. The chances of a 50 basis point hike are now seen at zero after rising to more than 70% early last week.
The central bank is mostly expected to lower its fed-funds rate target to 4.25% to 4.5% by July, which implies at least one rate cut will take place by then, according to 30-day Fed Funds futures.
As of Friday, the MOVE index, which measures expected volatility in the Treasury market, sat at 140, its highest level of the year.
What analysts are saying
“The Fed may now find itself between a rock and a hard place. It wants to tighten policy to keep a lid on inflation but will now face questions as to whether policy is already too tight, given this nasty wobble in the banking system and the pressure higher rates are already putting on many companies’ cash flows,” said Russ Mould, investment director at U.K.-based AJ Bell.
“If nothing else, this is a reminder that the Fed may not find it easy to extricate itself from more than a decade of record-low interest rates and $7 trillion of quantitative raising (around a quarter of U.S. GDP) without something breaking somewhere. Money was cheap and tossed around with abandon as a result of the zero cost associated with it. Now markets are going through a journey once more to discover what is the cost of money, some of that prior reckless abandon could lead to trouble,” Mould said.
See: Silicon Valley Bank is a reminder that ‘things tend to break’ when Fed hikes rates
