After a big dip, government yields are waiting for a big return on Monday. Here’s why

What we saw on Friday was a large-scale fear of taking large uninsured deposits into a potentially scary FDIC weekend.

By Wolf Richter for WOLF STREET.

What we saw last week in the financial markets and particularly on Friday was fear – large-scale fear among individuals and companies with large uninsured deposits in certain banks. They pulled these deposits out of their accounts at these banks—millions or tens of thousands or hundreds of millions of dollars each—exacerbating the run on their bank. And they moved their money elsewhere, including to other banks, some of which received large amounts of deposits, and into government bonds.

In the financial market, huge demand pushed up prices and sent interest rates plunging amid whiplash-inducing volatility, ending Friday with another bout of panic buying as yields fell again after rising on Thursday. But on Monday, the weekend – and the fear of going into the weekend with large deposits – will be over, and interest rates are expected to rise massively.

The two-year Treasury yield fell 33 basis points on Friday to 3.81%, the lowest since September, after falling 109 basis points over a five-day period amid breathtaking ups and downs. So it’s fear you see here – fear of a horrendous bank weekend. And the next move, spurred by relief that no other bank collapsed over the weekend, knock on wood, should be a big boost:

These depositors, by pulling out their money and buying Treasuries and thus driving down interest rates, were not banking on an emergency 50 basis point rate cut via Fed teleconference on Sunday afternoon or whatever. It’s just that they didn’t want to go into a potentially scary weekend where they would find out on Sunday that their bank has been taken over by the FDIC.

They did not want to find out that their uninsured bank deposits would not be available for a while, and that when they would be available, there would only be a fraction. They didn’t want to find out on Sunday afternoon that their bank didn’t have enough deposits from self-righteous, well-connected billionaires with big megaphones and from companies in which those billionaires invested their billions.

They would not find out that their bank was just a normal bank and not a billionaire’s playground, and that the rules of deposit insurance would therefore be applied to them. And they preemptively withdrew their money, especially on Friday, and many of them bought government securities.

The six-month Treasury yield fell 23 basis points on Friday to 4.71%, the lowest since early December, after falling 61 basis points during the week.

The volatility of the yield was breathtaking. On Monday, the two-year yield plunged 57 basis points, after already plunging 30 basis points on Friday, March 10, when Silicon Valley Bank collapsed. Interest rates rose on Tuesday. On Wednesday they crashed during the day and then lifted some of the diving during the day. On Thursday, yields rose 21 basis points, including an intraday recovery of 40 basis points. And then on Friday there was such massive demand for two-year maturities that prices jumped and interest rates plunged 33 basis points – fears of a grisly banking weekend.

The volatility last week in the two-year yield exceeds anything we have seen during the worst moments of the pandemic and during the financial crisis. This chart shows day-to-day changes in basis points for the two-year interest rate. Fear-driven panic buying:

And Monday? It’s now Saturday afternoon and so far, so good, no collapse announcement in the news, knock on wood. Some bank takeover rumors in the news about First Republic and Credit Suisse and that would be a good thing. If this relative calm – or rather the absence of new chaos – continues, it will be met with relief in the depositor and banking scene on Monday, and Treasuries should sell off and interest rates should make a circus-worthy return.

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