Turmoil in the banking sector sparked a furious rally in government bonds Monday, with yields on some shorter-term Treasurys collapsing half a percentage point in hours.
Worries about inflation that had pushed some bond yields to multiyear highs less than a week ago gave way to new fears that problems with regional banks could damage the economy with speed that shocked investors. That shift unleashed a flood of cash to Treasurys, momentum that some analysts said was turbocharged by traders positioned for higher interest-rates buying bonds to close out their positions, along with others rushing to join the rally.
Yields, which fall when bond prices rise, started sliding during the Asia trading session soon after U.S. regulators, including the Federal Reserve, announced measures on Sunday night intended to mute the fallout from Silicon Valley Bank’s sudden collapse on Friday. They then took another nosedive when trading opened in Europe and continued to drop at the start of U.S. trading, while stock indexes wavered.
Silicon Valley Bank’s collapse prompted U.S. regulators to announce measures to mute the fallout, triggering yields to fall.
Photo:
TILMAN BLASSHOFER/REUTERS
The yield on the two-year Treasury note, a favorite Wall Street proxy for investors’ expectations for short-term rates, topped 5% for the first time since 2007 just last week. In recent trading Monday, it stood at 4.126%, on course for its biggest one-day decline since 2001. The yield has fallen faster than in any three-session stretch since 1987.
The yield on the 10-year Treasury note—a key borrowing benchmark that reflects investors’ longer-term outlook for economic growth, inflation and interest rates—fell to 3.53% from 3.694% Friday.
Monday’s rally was fueled in part by a massive swing in investors’ interest-rate expectations. One Wall Street adage holds that the Fed raises rates until something breaks and—with the failure of two regional banks since Friday—many investors said the central bank’s tightening campaign might now be much nearer to its conclusion.
Investors and economists closely watch Treasury yields because they set a floor on interest rates across the economy and serve as a benchmark against which other financial assets are valued. The Fed’s rapid rate increases sent yields surging last year, sparking stock declines and helping send the average 30-year mortgage rate as high as 7%.
Federal-funds futures, which traders use to bet on interest-rate moves, showed Monday morning a 64% chance that the Fed would still raise rates by 0.25 percentage point at its meeting next week, and a 36% chance that it wouldn’t move at all, according to
data.
On Wednesday, investors had wagered that there was a nearly 80% chance that the Fed would lift rates by 0.5 percentage point at its coming meeting.
“I’ve been a stalwart that there’s no recession on the horizon, but if bank credit starts to tighten, that’s going to be a real problem,” said
Andrew Brenner,
head of international fixed income at NatAlliance Securities.
Still, intensive volatility and booming trading volumes were making it difficult to discern signal from noise in the market.
Before last Thursday, the Fed’s tightening campaign had spurred investors to pile into bets that short-term yields would keep rising, a situation that left the market vulnerable to a sharp reversal if there was any shift in the fundamental outlook. Traders in futures markets had built wagers on the two-year yield rising to the highest levels since the onset of Covid-19,
data as of Feb. 24 show.
“Everything is all over the place, and no one really knows what is coming next,” Mr. Brenner said. “I think the right trade is to short Treasurys here, but I’ll be damned if I’m going to do it.” Shorting a security means betting it will fall in price.
U.S. government bonds and their close relatives, agency mortgage-backed securities, lie at the center of the current banking tumult. Both types of bonds are essentially guaranteed to be paid back by their maturity date, but their prices can decline as prevailing interest rates rise, making their own lower interest payments less attractive. Silicon Valley Bank ran into trouble in part because it had invested heavily in Treasurys and agency MBS, prices of which fell sharply last year as the Fed ratched up rates.
Worries about banks came ahead of an extremely important week of economic data, which some analysts warned could still provide an immediate challenge to investors’ newfound demand for bonds.
On Tuesday, the Labor Department will release its latest consumer-price index report, providing the first look at how inflation developed in February after data showed prices rose unexpectedly quickly in January. Reports on producer prices and retail sales are then due on Wednesday.
Accounting for the risk of struggles in the financial sector has made decisive trading in the Treasury market difficult, said Andres Sanchez Balcazar, head of global bonds at Pictet Asset Management. Pictet’s bond funds have been holding some short- and long-term Treasurys, but have been avoiding big trades.
“We’re going to continue holding those Treasurys, but I don’t think you want to try to be a hero at the moment,” Mr. Sanchez Balcazar said. “This can be summarized as a market where you don’t want to be short volatility.”
—Eric Wallerstein contributed to this article.
Write to Sam Goldfarb at sam.goldfarb@wsj.com and Matt Grossman at matt.grossman@wsj.com
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