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Treasury yields fall as banks look to pat the Fed

Treasury yields fell sharply on Monday as risk aversion in markets sent investors seeking perceived shelters and traders raised bets that the Federal Reserve would not raise interest rates this week.

Investors piled into sovereign bonds because of concerns about the health of the global banking system.

Adding to the allure of government paper was the prospect of $17 billion of Credit Suisse’s AT1 bondholders’ investments being wiped out as part of the bank’s takeover by UBS.

These bonds, also known as contingent convertible bonds or CoCos, have been a major funding source for European banks.

US 2-year Treasury yields, which are particularly sensitive to Federal Reserve policy, fell to a six-month low as traders bet that financial sector turmoil – and the economic damage that could be caused – could mean that the central bank will not raise borrowing costs at the conclusion of its policy meeting on Wednesday,

According to the CME FedWatch tool, markets are pricing in a 50.1% chance that the Fed will leave interest rates at a range of 4.50% to 4.75% after its meeting on March 22.

According to 30-day fed funds futures, the central bank is expected to move its fed funds rate target to 4.74% by May 2023.

Just a few weeks ago, before the collapse of US bank SVB Financial, the market anticipated the Fed’s so-called terminal rates to exceed 5.6% in the autumn. The Fed has begun expanding its balance sheet again to help infuse liquidity into the market.

Sovereigns were bought across the board, with the German 10-year bund yield TMBMKDE-10Y falling 16.8 basis points to 1.943%, its lowest this year, while French counterpart TMBMKFR-10Y fell 14.5 basis points to 2.550%.

what the analysts are saying

The Fed’s quantitative easing (QT) was clearly out the window since the Silicon Valley Bank (SVB) debacle. The Fed’s balance sheet ticked higher last week, helping ease stress at banks,” said Ipek Ozkaredskaya, senior analyst at Swissquote Bank.

The central bank said US banks last week borrowed about $165 billion from the Federal Reserve after the failure of Silicon Valley Bank. After the Fed provided $143 billion to SVB and Signature Bank failed, the Fed’s balance sheet grew by $297 billion to $8.64 trillion.

“But QT and last week’s emergency intervention are conceptually different. More interestingly, while we might think that reverse-QT could have some negative implications for inflation – because the Fed is adding liquidity to the system – An index on financial conditions in the US suggests that financial conditions have tightened sharply over the past week, at the tightest level since last fall and this could be an argument for the Fed to hold off on its rate hikes Is, ”Ozkardetskaya said.


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