The two-year U.S. Treasury yield, which typically moves in step with interest rate expectations, was up 3.2 basis points at 3.878%, having risen above 4% earlier in the day.
The yields on the notes fell more than 70 basis points last week, in their largest weekly fall since October 1987 as the market was gripped by fears of a global banking crisis.
Late on Sunday, UBS Group AG agreed to buy Credit Suisse Group AG at the behest of Swiss authorities. UBS will pay 3 billion Swiss francs ($3.23 billion) for its smaller rival and assume up to $5.4 billion in losses.
The shotgun deal came after the 167-year-old Credit Suisse received $54 billion in funding from the Swiss central bank last week after becoming the biggest victim of the turmoil unleashed by the collapse of U.S. lenders Silicon Valley Bank and Signature Bank. "The deal appears to be a temporary fix, and may lead to long-run rerating and repricing in corporate bonds," Charu Chanana, market strategist at Saxo Markets in Singapore. "A flight to short-term government bonds could continue, along with other safe havens like yen and gold."
Financial markets initially staged a modest relief rally in Asian trade but were wary about a range of risks including contagion, the fragile state of U.S. regional banks, and moral hazard. The yield on 10-year Treasury notes was up 3.3 basis points to 3.430%, while the yield on the 30-year Treasury bond rose 3 basis points to 3.631%.
A closely watched part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes , seen as an indicator of economic expectations, was at -45.3 basis points.
Last 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. Market is now pricing 55% chance of the Federal Reserve to stand pat and not hike interest rates at its meeting on Wednesday and expects deep rate cuts by the end of the year. "Asian investors are thinking about their portfolio… this time the problem comes from the US Treasuries," said Ju Wang, head of greater China FX & rates strategy at BNP Paribas.
"Do you long the US Treasuries for safe haven? Or do you take this time of the rally to reduce exposure?" Wang said, setting out investors' dilemma. "Investors loaded up on Treasuries in 2020- 2021 at a very low yields level... they are suffering from large mark-to-market loss," Wang said. In a move to boost the flow of cash around the world, the U.S. Federal Reserve offered daily currency swaps to ensure banks in Canada, Britain, Japan, Switzerland and the euro zone would have the dollars needed to operate. The change announced Sunday is a modest expansion of an existing program in which the Fed each week pays dollars to other major central banks in exchange for local currency. (Reporting by Ankur Banerjee in Singapore and Georgina Lee in Hong Kong; Editing by Simon Cameron-Moore)
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