(Bloomberg) — The yield on the two-year Treasury note fell, on course for its biggest one-day drop in decades, while tech stocks bounced back from last week’s gains as the collapse of Silicon Valley Bank reverberated across trading desks.
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The two-year fell more than half a percentage point to less than 4%, heading for the biggest three-day retreat since Black Monday in October 1987, as investors poured into safe havens. Some money managers have taken profits in what may be a short squeeze from the treasury. The 10-year yield fell to a six-week low, while the dollar erased gains for the year.
The turmoil has caused a rapid reassessment of the direction of Fed policy. Swaps traders are now pricing in a less than one-in-two chance that the Fed will hike by another quarter point this cycle. Goldman Sachs Group Inc. economists and asset managers of the world’s largest actively managed bond fund from Pacific Investment Management Co. says the Fed may take a breather on key interest rates after SVB’s collapse. Expectations had weighed on a rise of as much as 50 basis points after Chairman Jerome Powell spoke to lawmakers on Tuesday.
The S&P 500 vacillated between gains and losses, reversing an early decline amid a slide in bank stocks, while the policy-sensitive Nasdaq rose as much as 2%, its most in more than a week. The fallout from SVB’s collapse prompted President Joe Biden to promise stronger regulation of US lenders while assuring depositors that their money is safe.
First Republic Bank fell as much as 79% as growing concerns about the state of US regional banks triggered trading halts across the sector. The KBW Bank index is heading for its biggest one-day drop since the start of the Covid-19 pandemic.
“The problem is, no one wants to be the last one in a room to turn off the lights. In other words, as soon as there’s a problem in a bank, the fear is real. Immediately everyone starts saying, ‘wait a minute, I have to also have my deposits in bank ABCD, etc.?'” Mayra Rodriguez Valladares, managing director at MRV Associates, said on Bloomberg TV.
“Bond yields are rising, which signals to the rest of the market that there is an increasing probability of default and loss rate. Even if the bank is well capitalized,” she added.
Treasury Secretary Janet Yellen said her office would protect “all depositors” at SVB. The administration’s actions will also include a new lending program that Fed officials said would be large enough to protect uninsured deposits in the broader U.S. banking sector. Still, state regulators’ sudden closure of New York’s Signature Bank on Sunday underscored the urgency of stabilizing the financial system.
“Fed needs to be off the table for now. They pushed prices until something snapped, guess what? Something snapped,” Peter Tchir, head of macro strategy at Academy Securities, said on Bloomberg TV.
“Seeing QT stop wouldn’t be surprising and maybe something to support the market. I think we’re back in crisis mode and remember, to me, bank runs are far more important than inflation, so that’s what they are have to arrest,” he said.
Monday’s moves in markets come after risk assets took a hit last week, with the US stock benchmark suffering its worst week since September. Wall Street’s so-called “fear gauge” rose, and the Cboe volatility index rose above 30 for the first time since October. Anxiety is also high ahead of Tuesday’s consumer price index report.
Additional views on the Fed’s next move:
The pressure on the banks dampens the interest rate outlook somewhat, but a decisive effort for financial stability gives the Fed leeway to continue with interest rate increases; 50 in March is not impossible as it would have been under a weak financial stability response and ongoing runs, but it looks very unlikely – we still see 25 with a high bar for the break.
— Krishna Guha, Evercore ISI Head of Central Bank Strategy
Led by former post-crisis Federal Reserve chair Janet Yellen, the sweeping set of measures has helped ensure doubts about systemic problems in the US banking system have been put to bed. With a quick response to the crisis, the Fed can return to its day job of raising interest rates to deal with inflation.
— James Lynch, Head of Fixed Income Investments at Aegon Asset Management
The speculation about what the Fed will do before we even see CPI is probably unfounded. But if you look at Fed Funds futures, they’re pricing in cuts in the fourth quarter, and they’re pricing in the credible potential — like a 50% chance — that the Fed will do nothing at the March meeting. So there is too much noise about what else is happening, what does that mean for monetary policy.
— Arthur Hogan, Chief Market Strategist at B. Riley Wealth
Elsewhere in the markets, oil dipped, while gold rose on its appeal as a safe haven.
Some of the most important movements in markets:
Equities
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The S&P 500 rose 0.3% as of 13:18 New York time
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The Nasdaq 100 rose 1.2 per cent.
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The Dow Jones Industrial Average rose 0.1 percent.
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The MSCI World index was little changed
Currencies
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The Bloomberg Dollar Spot index fell 0.8 percent.
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The euro rose 1% to $1.0748
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The British pound rose 1.1% to $1.2165
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The Japanese yen rose 1.5% to 133.01 per dollar
Cryptocurrencies
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Bitcoin rose 12% to $24,003.83
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Ether rose 6.8% to $1,663.97
Bonds
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The yield on 10-year government bonds fell 21 basis points to 3.49%
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Germany’s 10-year yield fell 25 basis points to 2.26%
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UK 10-year yields fell 27 basis points to 3.37%
Raw materials
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West Texas Intermediate crude fell 1.9% to $75.23 a barrel. barrel
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Gold futures rose 2.6% to $1,916.30 a barrel. ounces
This story was produced with assistance from Bloomberg Automation.
–With assistance from Vildana Hajric, Cecile Gutscher, Alyce Andres and Benjamin Purvis.
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