Treasuries swung to a loss Tuesday, a sign of traders’ heightened sensitivity to news on the health of the banking system ahead of key inflation data that may determine the Federal Reserve’s next move.
(Bloomberg) — Treasuries swung to a loss Tuesday, a sign of traders’ heightened sensitivity to news on the health of the banking system ahead of key inflation data that may determine the Federal Reserve’s next move.
Two-year yields took a huge round trip, initially climbing to 4.19%, then plunging to 3.82% before surging again to 4.27%. That comes as markets resume bets on a potential Fed interest-rate hike next week, having briefly erased all tightening wagers on Monday.
The sharp moves follow the biggest drop in the two-year yield since 1982 on Monday, after the failure of Silicon Valley Bank and other US lenders. Nervousness was reignited Tuesday by Credit Suisse Group AG identifying “material weaknesses” in its reporting procedures, leaving the risk of contagion in investors’ minds.
“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,” 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
Treasuries have been whipsawed in the past week by the constantly changing outlook for borrowing costs. US overnight indexed swaps are now pricing 19 basis points of hikes for next week, down from 44 basis points seen last week. That puts the chances of a 25 basis-point move at around 75%.
Two-year yields traded up 26 basis points at 4.24% by 7:45 a.m. in New York, while 10-year rates were only up five basis points. Just last week, two-year Treasury yields surged above 5% after Fed Chair Jerome Powell sparked wagers the central bank will accelerate the pace of its hikes at the March 22 meeting.
Moves by US authorities to support the banking sector have spurred 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 and Pacific Investment Management Co. asset managers have said the Fed may take a breather on the policy rate following the collapse of SVB, while Nomura Securities economists think the Fed may even 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.”
–With assistance from Michael G. Wilson, Greg Ritchie and Cormac Mullen.
(Updates prices.)
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