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U.S. two-year yield hits lowest since Oct. 2022
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U.S. two-year yield 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 4.8%
(Updates prices, adds new analyst comment)
By Gertrude Chavez-Dreyfuss
NEW YORK, March 13 (Reuters) - Short-dated U.S. Treasury
yields plummeted 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 briefly fell below 4% for the first time since last October and
was last down 53.1 basis points (bps) at 4.057%. The two-year
note's yield, which reflects interest rate move expectations,
was on track for the biggest one-day drop since October 1987 in
the wake of that fateful Black Monday stock market crash.
It recorded its biggest three-day drop of 96 bps since
October 1987 as well.
The U.S. two-year/10-year yield curve also steepened sharply on Monday, narrowing its inversion to -54.70 bps , as investors reduced rate hike expectations. That is the tightest gap since early January. The curve was last at -58.10 bps. U.S. banking regulators pledged on Sunday to ensure depositors at the now-shuttered Silicon Valley Bank would have access to their funds and set up a new facility to give banks access to emergency funds. The Federal Reserve also made it easier for banks to borrow from it in emergencies.
On Monday, HSBC said it would acquire SVB's British unit. "What we saw from the Fed was a quick and correct intervention, putting in some circuit breakers into the system. Is it enough to stop a repricing? No," said Guy Miller, chief market strategist at Zurich Insurance Group in Switzerland. "What they did was significant but the risks are still there, particularly as we still face recession and rising defaults. The Fed and ECB are still moving rates higher. Right now I don't think the Fed will do more," Miller added. U.S. rate futures on Monday have priced in a 69% chance of a 25-bps hike at next week's Fed policy meeting, with a more than 30% probability of a pause. 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 4.8% 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 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," Goldman analysts, led by chief economist Jan Hatzius, said in a note.
The benchmark 10-year Treasury yield fell 17 bps to 3.524%, after dropping to 3.418% , the lowest since Feb. 3. European short-dated bonds also rallied dramatically, with Germany's two-year yield plunging to 2.499%, the lowest since Feb. 3. The two-year yield was last down 7 bps at 2.631% 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 2:51PM New York / 1851 GMT
Price Current Net
Yield % Change
(bps)
Three-month bills 4.7 4.8194 -0.136
Six-month bills 4.6375 4.8116 -0.317
Two-year note 101-14/256 4.0594 -0.529
Three-year note 102 3.912 -0.393
Five-year note 101-112/256 3.6801 -0.273
Seven-year note 102-56/256 3.6362 -0.215
10-year note 99-200/256 3.5261 -0.169
20-year bond 100-160/256 3.8297 -0.070
30-year bond 99-72/256 3.6646 -0.035
DOLLAR SWAP SPREADS
Last (bps) Net
Change
(bps)
U.S. 2-year dollar swap 21.75 -5.00
spread
U.S. 3-year dollar swap 11.75 -1.25
spread
U.S. 5-year dollar swap 5.75 1.00
spread
U.S. 10-year dollar swap 0.25 1.75
spread
U.S. 30-year dollar swap -43.50 -0.25
spread
<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ Biggest three-day fall in UST yields since 1987 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> (Reporting by Gertrude Chavez-Dreyfuss in New York; Additional reporting by Harry Robertson, Amanda Cooper, Dhara Ranasinghe in London, and Stefano Rebaudo; Editing by Dhara Ranasinghe, Will Dunham and Kirsten Donovan)
