TREASURIES-Bonds consolidate huge gains as investors bay for Fed easing

By Wayne Cole SYDNEY, March 14 (Reuters) - Treasuries steadied in Asia on Tuesday as investors digested the biggest boom in bonds in three decades and a radically changed outlook for interest rates, with futures pricing in the chance of policy easing as early as July. Global markets have been tumultuous since the collapse of U.S. lender Silicon Valley Bank last week, and worries about contagion intensified after Signature Bank folded at the weekend. Analysts at Nomura were even predicting the Federal Reserve would cut rates at its meeting next week, which would be a breathtaking reversal given policy makers had been flagging a hike of up to half a point. "We expect a 25 basis point rate cut and a halt of balance sheet reduction in March, while a new lending facility is possible," they wrote in a note. That was a step beyond Goldman Sachs which stoked a major rally on Monday by forecasting the Fed would pause its tightening on March 22, but still hike in May, June and July. Futures are still leaning toward a quarter-point rate rise next week to 4.75-5.0%, though with a 27% chance of no move at all. A week ago the market was wagering heavily on a rise of 50 basis points, and a peak between 5.5% and 6.0%. Now, futures imply a terminal rate of 4.83% and a cut to 4.30% in July, with 3.96% priced in for year end. The drastic turnaround reflects investor concerns that the collapse of several U.S. banks will lead to a painful tightening in lending conditions and a credit crunch. "That raises the risk that the economy will suffer a harder landing, which would accelerate the needed disinflationary adjustment," wrote analysts at Capital Economics. "Under those circumstances, it makes sense that futures markets now expect little in the way of additional rate hikes from the Fed, and instead see rates being cut later this year." It was this risk that saw two-year note yields tumble almost 61 basis points on Monday in the largest single-day fall since the 1987 stock market crash. The sheer scale of the move saw yields edge 12 basis points higher to 4.109% on Tuesday, though that remains a world away from last week's top of 5.085%. Yields on 10-year notes held at 3.569%, having fallen 13 basis points on Monday as the curve bull steepened. Dealers were wary in case U.S. consumer price data (CPI) due later in the session surprised on the high side and added to pressure on the Fed to keep tightening. Jan Nevruzi, a bond analyst at NatWest Markets, said they were forecasting an upside surprise for the CPI reading but that the data had been overtaken by events. "We now expect to see a pause of rate hikes and QT at the March meeting," he added. "The rationale is that even though inflation is still a major concern, financial stability risks might take precedence in the near term – and any strong data may be seen as old news." <^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Biggest three-day fall in UST yields since 1987 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Wayne Cole; Editing by Muralikumar Anantharaman)

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