"The fall in U.S. yields is the driving force currently. Local bonds will continue to track these moves," said a trader with a state-run bank. U.S. Treasury yields crashed on Friday as non-farm payrolls increased more than estimated, while average hourly earnings rose slightly below expectations. Meanwhile, SVB Financial Group became the largest bank to fail since the 2008 financial crisis. These factors have led to strong bets that the Federal Reserve's rate hike cycle may end earlier than expected, with rate cuts back into the picture.
"In light of the stress in the banking system, we no longer expect (the Fed) to deliver a rate hike at its next meeting," Goldman Sachs said. "We have left unchanged our expectation that (the Fed) will deliver 25-basis point (bps) hikes in May, June, and July and now expect a 5.25-5.5% terminal rate, though we see considerable uncertainty about the path."
The 10-year U.S. yield dropped 23 bps on Friday and was at 3.70%, while the two-year yield , a closer indicator of interest rate expectations, plunged 31 bps. The yield dropped a further 17 bps on Monday and was at 4.40%.
The Fed funds futures are now pricing an 82% chance for a 25-bps hike in March, and 18% for rates being left unchanged. The odds for a 50-bps hike had risen to 68% last week after Fed Chair's remarks. (Reporting by Dharamraj Dhutia; Editing by Janane Venkatraman)
