Most yields on U.S. government debt plunged on Thursday as investors and analysts focused on the potential for wider fallout emanating from the banking sector.
What happened
- The yield on the 2-year Treasury TMUBMUSD02Y, 3.783% fell 16.9 basis points to 3.808% from 3.977% on Wednesday. Thursday’s level is the lowest since Sept. 14, based on 3 p.m. figures from Dow Jones Market Data.
- The yield on the 10-year Treasury TMUBMUSD10Y, 3.387% slipped 9.1 basis points to 3.406% from 3.497% as of Wednesday.
- The yield on the 30-year Treasury TMUBMUSD30Y, 3.661% declined 1.2 basis points to 3.682% from 3.694% Wednesday afternoon.
What drove markets
Yields continued to slide on Thursday with bank-stability risks back in focus, a day after Federal Reserve Chairman Jerome Powell told reporters that policy makers would use their tools to protect depositors.
Treasury Secretary Janet Yellen weighed in on Thursday, by saying in prepared testimony that the U.S. would take additional actions if needed to ensure deposits are safe. In addition, Sheila Bair, who ran the Federal Deposit Insurance Corp. from 2006 to 2011, told MarketWatch that regional banks shouldn’t be the only source of worry: “We need to be mindful of all unmarked securities at banks — small, medium and large.”
Separately, Moody’s Investors Service, one of the Big Three credit-ratings firms, said that despite quick action by regulators and policy makers, there’s a growing risk that banking-system stress will spill over into other sectors and the U.S. economy, “unleashing greater financial and economic damage” than the agency anticipated.
Read: Moody’s sees risk that U.S. banking ‘turmoil’ can’t be contained and Bill Ackman warns of acceleration in deposit outflows from banks despite Fed’s assurances
Meanwhile, fed funds futures traders priced in a 70% probability that the Fed will stand pat in May, and a 30% chance that policy makers will raise rates by another 25 basis points to between 5% and 5.25% by then, according to the CME FedWatch tool.
The central bank is mostly expected by traders to cut its main interest-rate target range to between 4% and 4.25%, or lower, by year-end despite Powell’s statement on Wednesday that “rate cuts are not in our base case.”
Read: Powell says no rate cuts in 2023, but the bond market doesn’t agree
In U.S. economic releases on Thursday, initial jobless claims dipped to a three-week low of 191,000 last week, signaling little erosion in a strong labor market, and the U.S. current account deficit dropped 5.6% to $206.8 billion in the fourth quarter.
U.K. 10-year gilt yields TMBMKGB-10Y, 3.356% were down 9.4 basis points at 3.357% after the Bank of England’s monetary policy decision. The BoE hiked interest rates by 25 basis points to 4.25% after data showed inflation had picked up to 10.4% year-over-year rate in February.
What analysts are saying
“My own take is that this is no longer really about the Fed,” said Brad McMillan, chief investment officer for Commonwealth Financial Network. “It raised rates but signaled there would be one more hike and no more. Markets were fine with that because they expect a recession and consequent rate cuts by the end of the year.”
“The Fed is no longer what markets are worried about and neither, really, is a recession,” McMillan wrote in an email. “What markets are now worried about is a financial crisis.”
