Investors swarmed into U.S government bonds Monday after the collapse of Silicon Valley Bank and subsequent government backstop of the banking system. The rush sent Treasury yields tumbling.
The yield on the 2-year Treasury was last trading at 4.06% down 53 basis points. (1 basis point equals 0.01%. Prices move inversely to yields.)
The yield has fallen 100 basis points, or a full percentage point, since Wednesday, marking the largest three-day decline since Oct. 22, 1987, when the yield fell 117 basis points. That move followed the Oct. 19, 1987 stock market crash — known as “Black Monday” in which the S&P 500 plunged 20% for its worst one-day drop. The move was bigger than the 2-year yield slide of 63 basis points that took place in three days following the 9/11 attacks.
The yield on the 10-year Treasury was down by close to 21 basis points at 3.477%.
Prices jumped and yields fell amid the collapse of Silicon Valley Bank that began last Thursday. Regulators had taken over the bank on Friday after mass withdrawals on Thursday led to a bank run. On Sunday, regulators announced they would backstop Silicon Valley Bank’s depositors.
As fears about contagion across the banking sector spiked, many investors looked to government bonds and other traditionally safer assets.
The financial shock also caused investors to rethink how aggressive the Federal Reserve will continue to be with rate hikes, helping to send short-term yields lower. The central bank is meeting next week and was largely expected to raise rates for a ninth time since March of last year — but that was before Silicon Valley Bank’s collapse happened last week.
Goldman Sachs no longer thinks the Fed will hike rates, citing “recent stress” in the financial sector. However, marking pricing indicated a solid tilt toward a 25 basis point increase at the March 21-22 meeting of the Federal Open Market Committee, according to a CME Group estimate.,
The 2-year Treasury yield rose to 5.085% last week, its highest since June 2007 before the sudden decline.
U.S. 2-year Treasury yield
“When you hit the brakes you risk both economic and financial accidents, and we just lived through a financial accident,” economist Mohammed El-Erian said on CNBC’s “Squawk Box,” referring to the Fed’s aggressive tightening campaign.
Investors also braced themselves for a series of key inflation data due this week. February’s consumer price inflation report including the latest reading of the core inflation rate are expected Tuesday, followed by wholesale inflation data on Wednesday.
That comes after Federal Reserve Chairman Jerome Powell indicated last week that the central bank’s upcoming interest rate decision would be data-dependent. Powell also suggested that interest rates would likely go higher than expected as the Fed’s battle with inflation continues.
Citigroup economists think the Fed will follow through with a 25 basis point increase next week rather than hold off in response to the banking tumult.
“Doing so would invite markets and the public to assume that the Fed’s inflation fighting resolve is only in place up to the point when there is any bumpiness in financial markets or the real economy,” Citi economist Andrew Hollenhorst said in a client note.