Investors flocked to US government bonds on Monday after the failure of Silicon Valley Bank and the consequent government bailout of the banking industry. Treasury rates fell as a result of the rush.
The 2-year Treasury yield was last trading at 4.06%, down 53 basis points. (1 basis point = 0.01%). Prices move in the opposite direction of yields.
Since Wednesday, the yield has plunged 100 basis points, or one percentage point, the greatest three-day drop since Oct. 22, 1987, when it fell 117 basis points. The action followed the Oct. 19, 1987 stock market disaster, dubbed “Black Monday,” in which the S&P 500 fell 20% in one day, its largest one-day decline in history. The shift was larger than the 63 basis point drop in 2-year yields that occurred three days after the 9/11 attacks.
The 10-year Treasury yield fell by about 21 basis points to 3.477%.
Prices rose as rates declined in the aftermath of Silicon Valley Bank’s failure, which started last Thursday. On Friday, regulators took over the bank after large withdrawals on Thursday caused a bank run. Regulators said on Sunday that they will backup Silicon Valley Bank’s depositors.
When concerns about banking sector contagion grew, many investors turned to government bonds and other traditionally safer assets.
Short-term rates went down because the financial shock made investors question how active the Federal Reserve would continue to be with rate hikes.The central bank meets next week and was widely anticipated to hike interest rates for the seventh time since March of last year — but that was before Silicon Valley Bank went bankrupt last week.
Goldman Sachs thinks that “recent stress” in the banking industry means that the Fed will not raise interest rates.According to a CME Group assessment, marking prices suggested a significant lean toward a 25 basis point rise at the Federal Open Market Committee meeting on March 21 and 22.
The 2-year Treasury yield surged to 5.085% last Monday, its highest level since June 2007 before a precipitous drop.
Investors are also bracing for a slew of critical inflation data expected this week. The consumer price inflation report for February, which contains the most recent measurement of the core inflation rate, is due on Tuesday, followed by wholesale inflation data on Wednesday.
This comes after Federal Reserve Chairman Jerome Powell said last week that the next interest rate decision by the central bank will be based on data.Powell also predicted that interest rates would rise faster than anticipated as the Fed battled inflation.
Citigroup analysts believe the Fed will proceed with a 25 basis point hike next week rather than deferring in reaction to the financial turmoil.
“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.