Bond traders are turning their focus to next Wednesday’s pivotal Federal Reserve decision after what has been the most volatile week in US debt markets in more than a decade.
(Bloomberg) — Bond traders are turning their focus to next Wednesday’s pivotal Federal Reserve decision after what has been the most volatile week in US debt markets in more than a decade.
US two-year yields were whipsawed at least 20 basis points a day for six straight sessions through Thursday — including a drop of 61 basis points — as concern over the global banking system and relief at central bank stabilization measures have kept investors on tenterhooks. Market pricing for the Fed’s March 21-22 meeting has lurched between another quarter-point hike, and the first rate pause in more than a year.
“With the sharp drop in Treasury yields and market pricing out hikes, investors remain on high alert ahead of the FOMC meeting,” Societe Generale SA strategists led by Adam Kurpiel wrote in a note to clients. “Price action in bonds, higher volatility and continued pressure on risky assets show that we are not out of the woods yet.”
The widely watched MOVE index, which measures implied volatility in Treasuries, topped out at 199 points on Wednesday, the highest level since the global financial crisis in 2008, having more than doubled since the end of January. The yield on US two-year notes, seen among the safest global securities, has swung between 3.71% and 4.53% this week, the widest weekly range since September 2008.
Two-year yields surged 27 basis points on Thursday alone after the biggest US banks pledged $30 billion of fresh deposits to First Republic Bank. The initiative helped ease concern about potential contagion engulfing US regional banks following the collapse of Silicon Valley Bank, Signature Bank and Silvergate Capital Corp.
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The moves moderated somewhat Friday, with yields resuming their slide. The two-year rate fell as much as 17 basis points to 3.99%, while the 10-year yield was down as much as 15 basis points to 3.43%. The odds of a quarter-point hike by the Fed next week slipped to three-in-four, based on market pricing.
The big unknown now is whether the recent easing of concerns will hold into the Fed decision, BMO Capital Market strategists including Ian Lyngen in New York wrote in a note Thursday. “We anticipate that there will be further strains evident throughout markets and the real economy as Fed Chair Powell retains a decidedly restrictive policy stance.”
–With assistance from Matthew Burgess, Joanna Ossinger and Masaki Kondo.
(Updates yield and rate levels.)
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