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U.S. two-year yield hits lowest since Oct. 2022
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U.S. two-year posts largest three-day drop since 1987
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U.S. 2/10 yield curve steepens, narrowest gap since
January
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U.S. rate futures see peak fed funds rate at 4.75%
(Updates prices, adds new analyst comment, NEW YORK dateline,
Treasuries table)
By Gertrude Chavez-Dreyfuss, Harry Robertson and Amanda
Cooper
NEW YORK/LONDON, March 13 (Reuters) - Short-dated U.S.
Treasury yields plunged on Monday, pushing their prices higher,
as the collapse of Silicon Valley Bank prompted investors to
drastically pare back expectations of a big Federal Reserve rate
hike next week and seek the safety of government debt.
The yield on the U.S. two-year Treasury note fell
below 4% for the first time since last October and was last down
48 basis points (bps) at 4.107%. The two-year note's yield,
which reflects interest rate move expectations, was on track for
the biggest one-day drop since September 2008 in the midst of
the global financial crisis.
It also recorded its biggest three-day drop, at 97 bps,
since the Black Monday stock market crash in 1987.
The U.S. two-year/10-year yield curve also steepened
sharply on Monday, narrowing its inversion to -57.40 bps , as investors reduced rate hike expectations.
That is the tightest gap since early January. The curve was last
at -63.20 bps.
U.S. banking regulators pledged on Sunday to ensure
depositors at the now-shuttered Silicon Valley Bank would have
access to their funds. On Monday, HSBC said it would
acquire SVB's British unit.
"The market thinks that this is not just SVB (Silicon Valley
Bank), but several banks. The sharp rise in policy rates and
sovereign yields over the last year and a half has put a lot of
banks under stress," said Stan Shipley, fixed income strategist
at Evercore ISI in New York.
"The consequence is that the outlook for rates is not going
to be as high as previously thought. Last Wednesday, you had
people thinking 6% (peak fed funds rate) is a sure thing. I
don't think anybody thinks that now," Shipley added.
U.S. rate futures on Monday have priced in a 60% chance of a
25-bps hike at next week's Fed policy meeting. The market last
week was poised for a 50-bps increase prior to the SVB collapse.
Futures traders now expect a peak Fed funds rate of 4.75%
hitting in May. That was between 5.5% to 6% last week.
In light of the crisis, Goldman Sachs predicted the Fed
would not raise rates at its meeting next week at all, helping
drive a massive rally in short-dated government debt on Monday.
"We no longer expect the FOMC (Federal Open Market
Committee) to deliver a rate hike at its next meeting on March
22," Goldman analysts, led by chief economist Jan Hatzius, said
in a note. "We have left unchanged our expectation that the FOMC
will deliver 25 bp hikes in May, June and July and now expect a
5.25% to 5.5% terminal rate, though we see considerable
uncertainty about the path."
The benchmark 10-year Treasury yield fell 17 bps to 3.520%,
after dropping to 3.418% , the lowest since Feb. 3.
European short-dated bonds also rallied dramatically, with
Germany's 2-year yield plunging 50 bps to 2.499%, the
lowest since Feb. 3.
The European Central Bank sets interest rates on Thursday.
Pricing in money markets shows traders think a 50 bps hike,
taking rates to 3%, remains the most likely option, although
some expect a 25-bps increase.
March 13 Monday 10:14 AM New York / 1414 GMT
Price Current Net
Yield % Change
(bps)
Three-month bills 4.5925 4.7079 -0.247
Six-month bills 4.555 4.7241 -0.405
Two-year note 101-15/256 4.0574 -0.531
Three-year note 102-10/256 3.8982 -0.407
Five-year note 101-160/256 3.6388 -0.314
Seven-year note 102-120/256 3.5958 -0.255
10-year note 100-16/256 3.4923 -0.203
20-year bond 101-88/256 3.7782 -0.122
30-year bond 100-64/256 3.6112 -0.089
DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap 25.25 -1.50
spread
U.S. 3-year dollar swap 9.50 -3.50
spread
U.S. 5-year dollar swap 4.50 -0.25
spread
U.S. 10-year dollar swap -1.50 0.00
spread
U.S. 30-year dollar swap -45.25 -2.00
spread
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Biggest three-day fall in UST yields since 1987 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Gertrude Chavez-Dreyfuss in New York, Harry Robertson and Amanda Cooper in London; Additional reporting by Stefano Rebaudo; Editing by Dhara Ranasinghe, Will Dunham and Kirsten Donovan)
