SVB collapse rattles regional bank shares, Dow edge up

Government bonds rose as investors took up safer assets and changed expectations about central banks’ plans for interest rates due to the stress in the market.

Interest rates on short-term debt fell the most. The U.S. 2-year Treasury yield fell to 4.149% from 4.586% on Friday, extending its slide after its biggest daily drop since 2008 on Friday. Interest rates fall when bond prices rise.

The German equivalent rose by a third of a percentage point, among the biggest moves in a broad retreat in European government bond yields.

“There is clearly a flight to safety in the European bond markets,” said Shaniel Ramjee, multi-asset fund manager at Pictet Asset Management.

The Silicon Valley Bank crisis spurred savers to shift their money from bank deposits to government bonds, Mr. Ramjee said. “This is what we are seeing across Europe today. There is some fear about whether European banks are able to withstand it.”

The fund he manages has bought US and UK government bonds in recent days.

Investors adjusted their views on monetary policy, predicting that the Federal Reserve and the European Central Bank will not raise interest rates as aggressively going forward.

Federal funds futures now show traders expect the Fed’s benchmark interest rate to be raised once more to around 4.7% before cutting to 4.25% by the end of the year. Before the end of last week, expectations had been that the rate would reach over 5%.

“The market uses a standard crisis playbook that says anytime there are sensitivities in the financial system, the ability of central banks to raise interest rates goes down,” said Rohan Khanna, fixed income strategist at UBS.

This also gives a boost to bonds, according to Mr. Khanna. The U.S. national debt had its worst year on record in 2022 amid the fastest monetary tightening in decades.

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