(Bloomberg) — Government-bond yields headed for their biggest drop since 2008 as signs of distress at a California lender spurred traders to reassess the pace of US monetary tightening and boost odds of a rate cut later this year.
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Shorter-dated Treasury yields plummeted for a second day as traders downshifted expectations for the size of this month’s rate hike from the Federal Reserve be, now favoring a quarter-point move this month instead of a half. The market now also sees a quarter-point cut by the end of 2023.
A report on US jobs on Friday showed wage growth may be cooling, opening the way for yields to tumble amid concern about SVB Financial Group and the outlook for other US lenders. Trading in shares of SVB, which has tech startups as its main clients, was halted and CNBC reported the bank was in talks to sell itself. But a broad index of bank shares sank.
The two-year Treasury yield fell as much as 29 basis points to 4.58% as a bigger-than-forecast gain in US jobs for February failed to swing the market away from worries over financial contagion. The policy-sensitive benchmark has dropped about 45 basis points over the past two trading sessions, its biggest such drop since 2008. Investors also piled into German short-term debt, putting yields on that maturity on course for a similarly steep decline.
“It is incredible to see the whipsaw action in Treasury yields and it’s likely people want to own Treasuries into the weekend,” said Kevin Flanagan, head of fixed-income strategy at Wisdom Tree Investments.
Traders bet any turmoil at banks could reduce the Fed’s ability to keep hiking. Swaps for the March meeting show 33 basis points of tightening, down some 10 basis points from earlier in the week, while traders priced in a quarter-point Fed rate cut by year-end, a scenario which had dwindled to less than a coin-toss.
“The reaction in the market reflects the broader worry about US banks and investors did expect a beat in the payrolls number,” said Andrzej Skiba, portfolio manager at Bluebay Asset Management.
Markets are jittery on the potential fallout from the parent of Silicon Valley Bank, which has suffered losses on a portfolio including US Treasuries. Investors are now turning their attention to risks that may lurk in other financial institutions — and questioning the degree to which the Fed’s rate hikes have precipitated that pain.
US payrolls in February rose by more than expected while a broad measure of monthly wage growth slowed, offering a mixed picture as the Fed decides whether to step up the pace of rate hikes. The unemployment rate ticked up to 3.6% as the labor force grew, and monthly wages rose at the slowest pace in a year. Nonfarm payrolls increased 311,000 after a 504,000 advance in January, revised down from 517,000.
Traders will now look to whether next week’s release of US consumer inflation data warrants pricing in a quarter-, or half-point hike this month.
“The market is clearly reading that the labor report is solid but not strong enough for the Fed to re-accelerate the hiking cycle,” said Roberto Cobo Garcia, BBVA’s head of G10 FX strategy. “It would probably take very significant surprises in the CPI data next week for the Fed to change course again.”
–With assistance from Sydney Maki, James Hirai, Tasos Vossos, Ksenia Galouchko, Julien Ponthus, Giulia Morpurgo and John Viljoen.
(Updates throughout.)
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