Treasury two-year yields steadied Tuesday, recovering somewhat from their biggest drop since the Volcker era in the early 1980s.
(Bloomberg) — Treasury two-year yields steadied Tuesday, recovering somewhat from their biggest drop since the Volcker era in the early 1980s.
The yield advanced 20 basis points to 4.17%, after falling over 100 basis points in the previous three sessions. Traders are turning to US inflation data due later in the day for clues on the path for interest rates after the failure of several US banks muddied the outlook for Federal Reserve’s policy plan.
“The initial market reaction, which was a great deal of fear, may have been excessive,” said Aninda Mitra, a macro and investment strategist at BNY Mellon Investment Management in Singapore. “But I wouldn’t go so far as to say the panic is over just yet.”
There’s still caution over funding stresses at smaller banks in the US, and the upcoming consumer price print, he added.
Treasuries have been whipsawed in recent sessions by a fluid Fed rate-hike outlook. Yields surged early last week after Fed Chair Jerome Powell sparked wagers the central bank will accelerate the pace of its interest-rate hikes at the March 22 meeting. That’s before investors piled into government bonds as a crisis at Silicon Valley Bank raised concerns about lenders hurt by a jump in short-term borrowing costs.
Moves by US authorities to support the banking sector spurred some calls for the Fed 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 as well as asset managers Pacific Investment Management Co. said the Fed may take a breather on the policy rate following the collapse of SVB. Nomura Securities economists said the Fed may 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.
US overnight indexed swaps are now pricing for rates to peak at around 4.80% at the May meeting, with around 75 basis points of rate cuts priced in by year-end. This is a sharp contrast from last week where expectations were for US rates to peak at around 5.70% in September.
The series of rate cuts priced into markets might be difficult to materialize when inflation rate remains high, said Hideki Shibata, a senior rates and currencies strategist at Tokai Tokyo Research Institute. “I don’t see a further sharp move down in rates from here but they are unlikely to rebound sharply either.”
US February CPI will be released on Tuesday, which is expected to have increased 0.4% from the previous month, a deceleration from January’s 0.5% increase, according to economists surveyed by Bloomberg.
“Room to pause is not the same as reason to cut,” said Amy Xie Patrick, head of income strategies at Pendal Group Ltd. in Sydney. “For the near term, the short end moves are overdone.”
–With assistance from Yumi Teso, Chester Yung, Karl Lester M. Yap and Garfield Reynolds.
(Updates quote in paragraph three and four, prices in paragraph six and bank collapse background in final paragraph)
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