Bonds rallied, reversing earlier declines, and traders pared wagers on higher interest rates as fears grew that turmoil in the US banking sector could spread to Europe.
(Bloomberg) — Bonds rallied, reversing earlier declines, and traders pared wagers on higher interest rates as fears grew that turmoil in the US banking sector could spread to Europe.
The yield on two-year German notes dropped as much as 34 basis points after Credit Suisse Group AG’s top shareholder ruled out providing more assistance. US Treasuries also gained as investors sought protection in the safest assets, lowering the yield on similar-dated maturities by as much as 25 basis points.
“The market is sensitive to evidence of financial stress — old or new — given recent jitters as regards any possible systemic read-across from the SVB debacle,” Rabobank strategist Richard McGuire said, referring to collapsed US lender Silicon Valley Bank.
Credit Suisse shares tumbled more than 20% to a record low after Saudi National Bank Chairman Ammar Al Khudairy said in an interview with Bloomberg TV that he “absolutely” will not provide more assistance to the Swiss lender. The bank is in the midst of a complex three-year restructuring in a bid to return to profitability and has been hit hard by the bearishness from SVB’s demise.
The euro plunged as much as 1.1% to $1.0620, while other European risk-sensitive currencies such as the Norwegian krone fell against peers. Meanwhile the Japanese yen — typically considered a haven currency — outperformed other Group-of-10 currencies.
Jitters over the health of the global banking sector prompted traders to pare bets on further rate hikes by the Federal Reserve and the European Central Bank. After dramatically toning down those wagers on Monday, investors started returning to those positions on Tuesday and earlier on Wednesday, before the Credit Suisse news hit market confidence.
Whipsawed
Treasuries and German bonds have been whipsawed in the past week by the constantly changing outlook for borrowing costs.
While moves by US authorities to support the banking sector have spurred calls for the central bank to soften its policy stance, signs of entrenched inflation have supported the case for more tightening. Underlying US consumer prices rose in February by the most in five months.
Two-year German yields climbed as much as 13 basis points earlier Wednesday after Reuters reported the ECB is still aiming for a 50 basis-point rate hike on Thursday because inflation is expected to accelerate further. Swaps currently price in 38 basis points in hikes for this week, down from 47 earlier on the day. For the Fed, money markets imply 14 basis points in tightening next week.
“The market remains nervous, which leads to excessive volatility,” said Jan von Gerich, chief strategist at Nordea. “I think the ECB will be slow to turn, unless market conditions really deteriorate.”
–With assistance from Neha D’silva, Marcus Wong, Masaki Kondo, Libby Cherry and Alice Gledhill.
(Updates with context, voices throughout.)
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