Treasury yields swung wildly Tuesday, a sign of traders’ heightened sensitivity to newsflow on the health of the banking system and bets on the outlook for US rate hikes.
(Bloomberg) — Treasury yields swung wildly Tuesday, a sign of traders’ heightened sensitivity to newsflow on the health of the banking system and bets on the outlook for US rate hikes.
Two-year yields slid as much as 15 basis points to 3.82%, erasing an earlier advance of 22 basis points after Credit Suisse Group AG said it had identified “material weaknesses” in its recent reporting procedures. Bund futures rallied with the yen, before paring gains.
The sharp moves highlighted the nervousness in markets after the failure of Silicon Valley Bank and several other US lenders muddied the path for the Federal Reserve’s policy plan. Two-year yields saw their biggest drop since the Volcker era in the early 1980s on Monday.
Investor focus now turns to US inflation data due later in the day for clues on the future for interest rates.
“Markets are very sensitive to any news and indication of the economy and the health of the financial sector, especially as we head into the US CPI tonight,” said Jessica Ren, a strategist at Westpac Banking Corp. in Sydney. “Any signs of distress especially within the banking sector will likely see a reaction on the back of it.”
Credit Suisse Finds ‘Material Weakness’ in Financial Reporting
Only last week, Treasury yields surged after Fed Chair Jerome Powell sparked wagers the central bank will accelerate the pace of its interest-rate hikes at the March 22 meeting. Moves by US authorities to support the banking sector spurred some calls for the central bank to soften its policy stance, but there’s a lack of consensus of how the crisis will impact official thinking.
Goldman Sachs Group Inc. economists as well as asset managers Pacific Investment Management Co. said the Fed may take a breather on the policy rate following the collapse of SVB. Nomura Securities economists said the Fed may cut its benchmark rate by a quarter percentage-point next week. However, BlackRock Investment Institute said it expects the US central bank to press ahead with rate hikes to combat inflation.
“One has to be careful to make another assumption that shockwaves emanating from several bank failures can be ringfenced effectively,” said Winson Phoon, head of fixed income research at Maybank Securities Pte Ltd in Singapore. “Previously it was fundamentals that drove market sentiment but now, an avalanche of sentiment can change the fundamentals.”
US overnight indexed swaps are now pricing for rates to peak at around 4.75% at the May meeting, with around 80 basis points of rate cuts priced in by year-end. This is a sharp contrast from last week where expectations were for US rates to peak at around 5.70% in September.
“Amidst the increase in general risk aversion, investors are now paying more attention to all risks,” said Jan von Gerich, chief strategist at Nordea Markets in Helsinki. “And current uncertain market conditions are certainly an environment that boosts violent market moves.”
–With assistance from Michael G. Wilson.
(Updates throughout)
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