TREASURIES-U.S. yields sink as banking worries linger despite massive rescue for sector

By Gertrude Chavez-Dreyfuss NEW YORK, March 17 (Reuters) - U.S. Treasury yields dropped on Friday, as investor worries persisted about liquidity in the banking system despite financial rescues for beleaguered lenders Credit Suisse and First Republic Bank . U.S. two-year yields, which reflect interest rate expectations, were on track to post their largest weekly fall of more than 50 basis points (bps) since September 2001. U.S. five-year yields , meanwhile were on pace for their worst weekly performance since November. On Thursday, Credit Suisse became the first major global bank to be bailed out since the 2008 financial crisis as fears of contagion gripped the banking sector. And major U.S. banks led by JP Morgan Chase and Bank of America Corp injected $30 billion in deposits into First Republic, salvaging a lender caught up in a widening crisis triggered by the collapse of two other mid-size U.S. lenders over the past week. "Things have calmed down as a result of these actions, but they are not getting better. They are quick fixes of historic magnitude," said Brian Reynolds chief market strategist, at Reynolds Strategy in Massachusetts. Banks also sought record amounts of emergency liquidity from the Federal Reserve in recent days following the failure of Silicon Valley Bank and Signature Bank, Fed data showed on Friday, unraveling months of central bank efforts to shrink the size of its balance sheet. Banks took an all-time high $152.9 billion from the Fed's traditional lender-of-last resort facility known as the discount window as of Wednesday, while also taking $11.9 billion in loans from the Fed's newly-created Bank Term Lending Program. The discount window jump crashed through the prior record of $112 billion in the fall of 2008, during the most acute phase of the financial crisis. "There is a liquidity crisis in the banking system ... and a lot of risk in the bond market at one of the worst possible times," Reynolds said. "We have a lot of banks that turn out to have concentrated deposits and...depositors are taking their money out because they are scared of losing them." Volatility in the bond market soared to as much as 198.93 on Thursday, the highest since December 2008, at the height of the global financial crisis. The index was last at 167.96, suggesting that traders expect rates to move more than 10 bps over the next month. In late morning trading, the yield on 10-year Treasury notes was down 16.8 bps at 3.416%. On the week, the 10-year yield has weakened by 27 bps, the biggest decline since November. U.S. 30-year bond yields fell 10.2 bps to 3.612%.

A widely-tracked part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes , was at -56.9 bps. Earlier in the week, at the height of the banking turmoil, the curve reduced its inversion to -28.6 bps, the narrowest spread since October as investors reduced rate hike scenarios this year. The two-year U.S. Treasury yield, slid 14.9 bps to 3.981%. Fed funds futures on Friday priced in a 25-bp hike at next week's Fed meeting in the wake of solid data overall, with the inflation goal superseding banking sector concerns.

March 17 Friday 10:51AM New York / 1451 GMT Price Current Net Yield % Change (bps) Three-month bills 4.415 4.5246 -0.183 Six-month bills 4.615 4.8015 -0.098 Two-year note 101-49/256 3.9814 -0.149 Three-year note 102-88/256 3.7874 -0.201 Five-year note 102-40/256 3.5207 -0.216 Seven-year note 103-28/256 3.4917 -0.201 10-year note 100-180/256 3.4155 -0.168 20-year bond 101-152/256 3.7604 -0.111 30-year bond 100-56/256 3.6128 -0.101
DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)
U.S. 2-year dollar swap 27.75 1.50
spread
U.S. 3-year dollar swap 16.50 2.25
spread
U.S. 5-year dollar swap 11.50 1.25
spread
U.S. 10-year dollar swap 4.00 0.75
spread
U.S. 30-year dollar swap -43.25 0.00
spread

(Reporting by Gertrude Chavez-Dreyfuss Editing by Nick Zieminski)

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