Treasury yields bounce back as markets assess health of global banking system


Treasury yields reversed an earlier run of risk aversion on Monday as investors moved back out of perceived havens, while traders continued to price in a decent chance of the Federal Reserve’s not raising interest rates this week.

What’s happening
  • The yield on the 2-year Treasury

    advanced to 3.907% from 3.846% on Friday. Yields move in the opposite direction to prices.

  • The yield on the 10-year Treasury

    was 3.461%, up from 3.395% as of Friday.

  • The yield on the 30-year Treasury

    jumped to 3.656%, up from 3.6% Friday afternoon.

What’s driving markets

Lingering concerns about the health of the global banking system saw investors pile into sovereign bonds earlier on Monday, before the trend reversed in New York morning trading.

The sight of Credit Suisse’s AT1 bond holders having their billions in investment wiped out as part of the bank’s takeover by UBS added to the attraction of government paper. These bonds, also called contingent convertible bonds, or CoCos, have been a key funding source for European banks.

On Friday, 2-year Treasury yields, which are particularly sensitive to Federal Reserve policy, posted their biggest one- and two-week declines since October 1987 as traders added to bets that turmoil in the financial sector — and the economic damage it might do — means the central bank will not raise borrowing costs at the conclusion of its two-day policy meeting on Wednesday.

Markets are pricing in a 28.4% chance of a pause and a 71.6% probability that the Fed will leave lift interest rates by a quarter of a percentage point to between 4.75% and 5% in two days, according to the CME FedWatch tool.

The central bank is also mostly seen as cutting rates by at least 75 basis points from the current level of 4.5% to 4.75% by year-end, according to 30-day federal funds futures.

Just a few weeks ago, before the U.S. bank SVB Financial Group collapsed, the market forecast the Fed’s so-called terminal rate at more that 5.6% in the autumn. The Fed has begun expanding its balance sheet again to help boost liquidity in the market.

Sovereigns were bought across the board. The German 10-year bund yield

fell 1.6 basis points to 2.094% after touching the lowest level this year, while its French peer

slipped 3.9 basis points to 2.655%.

What analysts are saying

“Three difficult issues confront policy makers and markets this month,” said Jim Vogel, executive vice president at FHN Financial in Memphis: that the actions taken to address individual bank problems have undermined the value of the securities and systems that support all banks; that, “in previous market distress, households moved their assets into banks because they were a safe haven [and banks] were the right kind of anchor, but not today”; and, third, that looser monetary policy “has been a valuable step in previous distress episodes … again, not available today.”

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