The yield on the two-year Treasury note plunged, on course for its biggest one-day slump in decades, while stocks rebounded from last week’s rout as the collapse of Silicon Valley Bank reverberated across trading desks.
(Bloomberg) — The yield on the two-year Treasury note plunged, on course for its biggest one-day slump in decades, while stocks rebounded from last week’s rout as the collapse of Silicon Valley Bank reverberated across trading desks.
The policy-sensitive two-year plunged by more than half a percentage points to less than 4%, heading for the biggest three-day retreat since Black Monday of October 1987, as investors poured into haven assets. The 10-year yield fell to a six-week low, while the dollar erased its gains for the year.
The turmoil has caused a swift reassessment over the direction of Fed policy. Swaps traders are now pricing a less than one-in-two chance the Fed will hike by another quarter point this cycle. Goldman Sachs Group Inc. economists as well as money managers at the world’s largest actively managed bond fund from Pacific Investment Management Co. are saying the Fed could take a breather on the policy rate following the collapse of SVB. Expectations had weighed a hike of as much as 50 basis points after Chair Jerome Powell addressed lawmakers Tuesday.
The S&P 500 gained, reversing an early drop amid a rout in bank shares while the policy-sensitive Nasdaq climbed as much as 2%, the most in over a week. The fallout from SVB’s collapse prompted President Joe Biden to promise stronger regulation of US lenders, while reassuring depositors that their money is safe.
First Republic Bank slumped as much as 79% as growing worries about the state of US regional banks trigged trading halts across the sector. The KBW Bank Index is on track for its biggest one-day drop since the start of the Covid-19 pandemic.
“Problem is that nobody wants to be the last one in a room turning off the light. In other words, as soon as there is a problem in one bank, fear is real. Immediately everybody starts to say, ‘wait a minute, should I also have my deposits at bank ABCD etc.?,’” Mayra Rodriguez Valladares, managing principal at MRV Associates said on Bloomberg TV.
“Bond yields go up, which signal to the rest of the market that there is an increasing probability of default and loss severity. Even if the bank is well capitalized,” she added.
Treasury Secretary Janet Yellen said her office would protect “all depositors” at SVB. The government actions will also include a new lending program that Fed officials said would be big enough to protect uninsured deposits in the wider US banking sector. Still, the sudden closure of New York’s Signature Bank by state regulators Sunday underscored the urgency of stabilizing the financial system.
“The Fed has to be off the table for now. They pushed on rates until something cracked, well guess what? Something cracked,” said Peter Tchir, head of macro strategy at Academy Securities, on Bloomberg TV.
“To see QT stop would not be surprising, and maybe something to support the market. I think we’re back in crisis mode, and remember, to me, bank runs are way way way more important than inflation, so that’s what they’ve got to be arresting,” he said.
Monday’s moves in markets come after risk assets got pummeled last week, with the US stock benchmark suffering its worst week since September. Wall Street’s so-called “fear gauge” spiked, with the Cboe Volatility Index rising above 30 for the first time since October. Anxiety is also running high ahead of Tuesday’s consumer price index report.
Additional views on the Fed’s next move:
Pressure on banks dampens the rate outlook some, but decisive action on financial stability gives the Fed latitude to continue with rate hikes; 50 in March is not impossible as it would have been under a weak financial stability response and ongoing runs but looks very implausible – we still see 25 with a high bar to pause.
— Krishna Guha, Evercore ISI head of central bank strategy
Led by ex-Federal Reserve chair after the financial crisis, Janet Yellen, the comprehensive set of measures has helped to ensure that doubts over systemic issues in the US banking system have been put to bed. With a speedy response to the crisis delivered, the Fed can get back to its day job of raising interest rates to deal with inflation.
— James Lynch, Fixed Income investment manager at Aegon Asset Management
Speculation about what the Fed’s going to do before we even see CPI is probably ill-founded. But if you look at the fed funds futures, they’re pricing in cuts in the fourth quarter and they’re pricing in the credible potential — like a 50% chance — that the Fed does nothing at the March meeting. So there’s too much noise around what else happens, what does this mean for monetary policy.
— Arthur Hogan, chief market strategist at B. Riley Wealth
Elsewhere in markets, oil dipped while gold rose on its allure as a haven.
Some of the main moves in markets:
Stocks
- The S&P 500 rose 0.4% as of 12:26 p.m. New York time
- The Nasdaq 100 rose 1.3%
- The Dow Jones Industrial Average rose 0.3%
- The Stoxx Europe 600 fell 2.4%
- The MSCI World index was little changed
Currencies
- The Bloomberg Dollar Spot Index fell 0.7%
- The euro rose 0.8% to $1.0728
- The British pound rose 0.9% to $1.2144
- The Japanese yen rose 1.3% to 133.31 per dollar
Cryptocurrencies
- Bitcoin rose 12% to $24,122.25
- Ether rose 7.4% to $1,672.92
Bonds
- The yield on 10-year Treasuries declined 20 basis points to 3.50%
- Germany’s 10-year yield declined 23 basis points to 2.27%
- Britain’s 10-year yield declined 25 basis points to 3.39%
Commodities
- West Texas Intermediate crude fell 1.9% to $75.24 a barrel
- Gold futures rose 2.3% to $1,909.50 an ounce
This story was produced with the assistance of Bloomberg Automation.
–With assistance from Vildana Hajric, Cecile Gutscher, Robert Brand, Allegra Catelli and Benjamin Purvis.
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