Nervous traders react first, question later as US treasuries swing
US TREASURY yields swung wildly on Tuesday (Mar 14), a sign of traders’ heightened sensitivity to news flow on the health of the banking system and bets on the outlook for US rate hikes.
Two-year yields slid as much as 15 basis points to 3.82 per cent, erasing an earlier advance of 22 basis points after Credit Suisse said that it had identified “material weaknesses” in its recent reporting procedures. Bund futures rallied with the yen, before paring gains.
The sharp moves highlighted the nervousness in markets after the failure of Silicon Valley Bank (SVB) and several other US lenders muddied the path for the US Federal Reserve’s policy plan. Two-year yields on Monday experienced their biggest drop since the Volcker era in the early 1980s.
Investor focus now turns to US inflation data due later in the day for clues on the future for interest rates.
“Markets are very sensitive to any news and indication of the economy and the health of the financial sector, especially as we head into the US consumer price index tonight,” said Jessica Ren, a strategist at Westpac Banking Corp in Sydney. “Any signs of distress, especially within the banking sector, will likely see a reaction on the back of it.”
Only last week, Treasury yields surged after Fed chair Jerome Powell sparked wagers that the central bank will accelerate the pace of its interest-rate hikes at the Mar 22 meeting. US authorities’ efforts to support the banking sector spurred some calls for the central bank to soften its policy stance, but there is a lack of consensus on how the crisis will impact official thinking.
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Goldman Sachs economists as well as asset managers Pacific Investment Management said that the Fed may take a breather on the policy rate following the collapse of SVB. Nomura Securities economists said that the Fed may cut its benchmark rate by a quarter-percentage-point next week. However, BlackRock Investment Institute said that it expects the US central bank to press ahead with rate hikes to combat inflation.
“One has to be careful to make another assumption that shockwaves emanating from several bank failures can be ringfenced effectively,” said Winson Phoon, head of fixed-income research at Maybank Securities in Singapore. “Previously, it was fundamentals that drove market sentiment, but now an avalanche of sentiment can change the fundamentals.”
US overnight indexed swaps are now pricing for rates to peak at around 4.75 per cent at the May meeting, with around 80 basis points of rate cuts priced in by year-end. This is a sharp contrast from last week, when expectations were for US rates to peak at around 5.70 per cent in September.
“Amid the increase in general risk aversion, investors are now paying more attention to all risks,” said Jan von Gerich, chief strategist at Nordea Markets in Helsinki. “And current uncertain market conditions are certainly an environment that boosts violent market moves.” BLOOMBERG
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