Bond yields fall most since 2008 as traders reconsider Fed path

(Bloomberg) — Treasury yields are on track for their biggest drop since 2008, as signs of distress at a California lender spurred traders to reassess the pace of U.S. monetary policy tightening and boost odds of a rate cut later this year.

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Short-term Treasury yields fell for a second day as traders lowered expectations for the size of this month’s rate hike by the Federal Reserve, 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 U.S. jobs report on Friday showed wage growth may be slowing, opening the way for interest rates to fall on concerns about SVB Financial Group and the outlook for other U.S. lenders. Trading in shares of SVB, which has tech startups as its main clients, was halted, and CNBC reported that the bank was in talks to sell itself. But a broad index of bank shares fell.

The two-year Treasury yield fell as much as 29 basis points to 4.58% as a bigger-than-expected increase in US jobs for February failed to sway the market away from concerns about financial contagion. The policy-sensitive benchmark has fallen about 45 basis points over the past two trading sessions, the biggest drop since 2008. Investors also piled into German short-term debt, putting yields on that maturity on course for a similarly steep decline.

“It’s incredible to see the whipsaw action in Treasury yields and it’s likely that people will own Treasuries into the weekend,” said Kevin Flanagan, head of fixed income strategy at Wisdom Tree Investments.

Traders are betting that any turmoil in the banks could reduce the Fed’s ability to continue hiking. Swaps for the March meeting show a tightening of 33 basis points, down about 10 basis points from earlier in the week, while traders priced in a quarter-point Fed rate cut by the end of the year, a scenario that had fallen to less than a coin. throw away.

“The reaction in the market reflects the broader concern about US banks and investors were expecting a hit in the payrolls number,” said Andrzej Skiba, portfolio manager at Bluebay Asset Management.

Markets are nervous about the potential fallout from the parent of Silicon Valley Bank, which has suffered losses on a portfolio that includes U.S. Treasuries. Investors are now turning their attention to risks that may be lurking in other financial institutions — and questioning the extent to which the Fed’s rate hikes have triggered this pain.

U.S. payrolls rose more than expected in February, while a broad measure of monthly wage growth slowed, painting a mixed picture as the Fed decides whether to pick up the pace of rate hikes. The unemployment rate ticked up to 3.6% as the labor force expanded and monthly wages rose at the slowest pace in a year. Nonfarm payrolls rose 311,000 after a gain of 504,000 in January, down from 517,000.

Traders will now look to see if next week’s release of US consumer inflation data warrants pricing in a quarter or half point increase this month.

“The market is clearly reading that the labor market report is solid, but not strong enough for the Fed to accelerate the hike cycle again,” said Roberto Cobo Garcia, BBVA’s head of G10 FX strategy. “It would probably take very significant surprises in the CPI data next week before the Fed changes course again.”

–With assists from Sydney Maki, James Hirai, Tasos Vossos, Ksenia Galouchko, Julien Ponthus, Giulia Morpurgo and John Viljoen.

(Updates throughout.)

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