Demand for some of the world’s safest securities surged after a government-brokered rescue deal of Credit Suisse Group AG failed to assuage concerns that stress in the banking system could spread.
(Bloomberg) — Demand for some of the world’s safest securities surged after a government-brokered rescue deal of Credit Suisse Group AG failed to assuage concerns that stress in the banking system could spread.
Investors rushed into short-dated government bonds, betting that the fallout from the deal — which wiped out over $17 billion of junior bondholders in the troubled Swiss lender — would tighten credit conditions and warrant a slower pace of tightening from major central banks. The US and German two-year yields dropped over 20 basis points, while the US 10-year yield slumped to the lowest since September.
The market has swung violently as investors’ attention shifted away from the battle against inflation to the implications of the collapse of three major US lenders and the woes of Credit Suisse Group AG on the broader banking system. Just a couple of weeks ago, investors were betting the Federal Reserve would raise rates close to 6% and the European Central Bank would hike past 4%. Now, markets imply the tightening cycles are almost over and wager on at least four rate cuts in the US by year-end.
“The market is still in panic-mode and not discarding that the current stress may develop into a liquidity crisis,” said Evelyne Gomez-Liechti, a rates strategist at Mizuho International Plc.
Regulators worldwide rushed to shore up market confidence over the weekend, with the Swiss government brokering a rescue deal of Credit Suisse Group AG and six central banks unveiling plans to boost dollar liquidity.
“Many will be wondering who could be next,” said Rodrigo Catril, a strategist at National Australia Bank Ltd. in Sydney. “Central banks need to instill confidence without given a message of concern.”
What was most damping risk sentiment Monday was concerns over global banks’ additional tier 1 bonds, after a Swiss regulator said 16.3 billion Swiss francs ($17.5 billion) of such notes from Credit Suisse will be wiped out.
“You have a marked re-pricing of a sizable chunk of banking sector credit” after the write down in AT1s, said Philip McNicholas, a strategist at Robeco in Singapore. “That has started to percolate through to equities and triggered a broader risk off tone and a flight to safety.”
US overnight indexed swaps price in a 60% chance of a quarter-point hike by the Fed this week — a move that was seen as given before the banking crisis sparked. Similarly for the Bank of England, which meets Thursday, chances of a same-size hike were slashed to 50%.
“A widespread perception of ongoing, significant banking risks is likely to give the Fed pause in its plan to raise rates,” said Jason Schenker, president of Prestige Economics.
German two-year yields dropped as much as 29 basis points to 2.10%, before paring the move to trade 11 basis points lower on the day as of 10:28 a.m. in London. US equivalent yields were seven basis points lower at 3.76% after falling as much as 21 basis points earlier.
“We are only at the start of what could be a long and wild week,” said Andrew Ticehurst, a rates strategist at Nomura Holdings Inc. in Sydney. “Markets are likely to remain on edge for some time.”
Two-year US yields swung between 3.71% and 4.53% last week, the widest weekly range for the interest-rate sensitive benchmark since September 2008. The widely-watched MOVE index, which measures implied volatility in Treasuries, topped out at 199 points on Wednesday, the highest since the global financial crisis in 2008.
“I don’t think we’ll settle into a new trading range until perhaps after this week’s FOMC,” said Jessica Ren, a fixed income strategist at Westpac Banking Corp. in Sydney. “Price action will continue to be more sensitive than usual to headlines.”
–With assistance from Ruth Carson, Masaki Kondo and Tian Chen.
(Updates with moves, comment and context throughout.)
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