Government bonds surged as investors sought haven assets amid mounting fears a drop in the value of the US banking sector’s debt holdings could hinder global tightening efforts.
(Bloomberg) — Government bonds surged as investors sought haven assets amid mounting fears a drop in the value of the US banking sector’s debt holdings could hinder global tightening efforts.
Treasuries extended gains for a second day, driving 10-year yields down by as much as 11 basis points to a three-week low of 3.80%. German 10-year government borrowing costs slid as much as 16 basis points to 2.49%, poised for their biggest slump since early February.
Silicon Valley Bank — a small technology-focused lender — said Thursday it suffered significant losses on its portfolio, which included US Treasuries and mortgage-backed securities. That’s turned the market’s attention to risks that may be lurking in other financial institutions as the Federal Reserve presses on with interest-rate hikes, eroding the value of their holdings.
“Broader banking concerns may put question marks behind the pace the Fed is able to raise interest rates,” said Christoph Rieger, head of fixed-rate strategy at Commerzbank AG.
Traders pared wagers on the scope for further Fed tightening, pricing 91 basis points of hikes by July, compared to 112 basis points on Wednesday, while odds of a half-point increase this month fell to 50% compared to 75% previously.
Money markets eased rate-hike wagers for the European Central Bank by as much as 18 basis points, pushing pricing for the terminal rate below 4% for the first time since Feb. 28.
One Bank Folds, Another Wobbles and Wall Street Ponders a Crisis
“It is not clear whether the asset deterioration from higher rates could put more smaller banks in a difficult position or whether there is contagion from SVB, flight-to-safety looks set to prevail,” Rieger said.
The Stoxx Europe 600 Index slumped the most in a month, led by banking shares, as concerns that signs of distress at a Californian lender could be an indicator of broader dangers.
Adding to the souring sentiment was Silvergate Capital Corp., which said it plans to wind down operations and liquidate after the crypto industry’s meltdown sapped the company’s financial strength.
–With assistance from James Hirai.
(Updates with chart, bonds moves, additional context.)
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