Government debt yields plunged globally Wednesday as mounting financial-stability concerns prompted bond traders to abandon bets on additional central-bank rate hikes and begin pricing in cuts by the Federal Reserve.
(Bloomberg) — Government debt yields plunged globally Wednesday as mounting financial-stability concerns prompted bond traders to abandon bets on additional central-bank rate hikes and begin pricing in cuts by the Federal Reserve.
Investors priced in a drop of more than 100 basis points in the US policy rate by year-end and downgraded the odds of additional hikes by the Bank of England and the European Central Bank. A weeklong rout in bank shares globally has unleashed historic demand for government debt and other havens.
In the US, two-year Treasury yields plummeted as much as 54 basis points to 3.71%, the lowest level since mid-September, while German two-year rates fell 48 basis points to 2.41%, a record drop. Longer-maturity yields also tumbled, with the US 10-year falling as much as 31 basis points to 3.38%, approaching its January low, and German 30-year yields falling the most ever. US yields were off their lows in late trading, down 13 to 32 basis points on the day.
The expected peak for the Fed policy rate — which exceeded 5.5% less than a week ago — slid to about 4.85%, pricing in an increase in May, with a quarter-point hike at next week’s policy meeting deemed a coin toss. The Bank of England is newly seen holding pat next week, and a quarter-point hike by the European Central Bank at its meeting tomorrow is favored, down from a half-point last week.
“The fear is such that it’s overwhelming everything,” said Ed Al-Hussainy, a rates strategist at Columbia Threadneedle Investments. US Treasury yields below the Fed’s current policy rate band of 4.5%-4.75% is “a strong signal the market is capitulating to an easing cycle.”
The Fed’s expected year-end rate has fallen to about 3.8%, more than a percentage point lower than the expected peak.
The thinking is that stress in the global banking system — which exploded into the open in the past week with the failure of three US institutions and continues to sink share prices for large financial companies globally — will test the Fed’s resolve to raise rates further to get inflation under control.
The repricing of Fed wagers occurred as a flight-to-quality bid swept through short-dated Treasuries, spurred by steep declines for European and US stocks. The catalyst was the latest slump in Credit Suisse Group AG shares after a top shareholder ruled out additional assistance to the Swiss bank. Its shares stabilized in late trading after the country’s central bank said Credit Suisse will receive a liquidity backstop if needed.
Bank shares were battered globally however, with the US KBW Bank Index down 25% since the beginning of last week. An index of banks in the Euro Stoxx 50 is down 4.6% this week.
“I think they should pause,” Bob Michele, chief investment officer of JPMorgan Asset Management, said on Bloomberg Television, referring to next week’s Fed meeting. “I think hiking rates — either the ECB hiking rates this week or the Fed hiking rates next week — has the potential to be the greatest gaffe since the ECB hiked rates in June 2008” during the global financial crisis.
Wednesday’s price action prolonged a period of extraordinary volatility in interest-rate markets. The US two-year note’s yield has moved 20 basis points each day for the past four, with Tuesday’s 27 basis-point rebound the only increase. Monday’s 61-basis-point drop was the biggest since 1982. A CME Group gauge of Treasury volatility increased to the highest level since March 2020, when the onset of the global pandemic sparked a stampede into haven assets.
Exactly a week ago, the two-year Treasury yield reached a multiyear high of 5.08% following congressional testimony by Fed Chair Jerome Powell, who said the central bank was prepared to reaccelerate the pace of interest-rate hikes if warranted. Traders almost completely abandoned any expectation of rate cuts this year.
On Friday, strong US employment data for February prompted at least Barclays to change its forecast for next week’s Fed meeting to call for a half-point rate increase instead of a quarter-point. Since then, Barclays and Goldman Sachs economists have scrapped calls for any rate increase on March 22. Nomura went a step further, calling for a rate cut in March and an end to Fed quantitative tightening.
Frenzied trading and wild price swings in short-term interest-rate futures Wednesday prompted CME Group to temporarily halt trading in some federal funds and Secured Overnight Financing Rate contracts as daily price limit bands were reached.
Mixed US economic data Wednesday morning contributed to the drop in yields, with a gauge of producer prices showing deceleration and a measure of New York manufacturing falling more than expected.
–With assistance from Liz Capo McCormick, Greg Ritchie, James Hirai, Libby Cherry and Alice Gledhill.
(Adds chart, updates yield levels.)
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