Investors flocked to the safety of Treasuries on Monday in a manner not seen since the days after the 1987 stock market crash, after two banks suddenly closed and banking regulators stepped in over the weekend to fully protect their deposits.
The policy-sensitive 2-year Treasury yield
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Briefly dipped below 4% early Monday, heading for its biggest three-day drop since October 22, 1987 – an infamous period ushered in by “Black Monday” when Dow Industrials fell 22.6% on October 19 of this year fell.
Also on Monday, the 2-year interest rate was poised for its biggest one-day decline since the 2007-2008 global financial crisis, while the 10-year yield BX:TMUBMUSD10Y was heading for its biggest three-day decline since that era.
Traders now see a good chance that the Federal Reserve will halt interest rate hikes this month, which will help boost US stocks on Monday after a significantly lower opening price. The three major stock indices
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were mostly higher in afternoon trade as Fed Funds futures traders priced in a 32.8% chance of a pause on March 22 — a view shared by at least one major Wall Street firm, Goldman Sachs Group Inc. GS, is shared
Read: SVB bailout means Fed won’t hike rates in March, says Goldman Sachs
“The market is assuming that the Fed’s long-awaited turnaround is now upon us,” said Keith Buchanan, senior portfolio manager at GLOBALT Investments in Atlanta. Fixed income market action on Monday reflected “a flight to quality as there are very few quality assets like Treasuries left. So whenever there is a crisis, people will flock to these very, very safe assets and of course they will push rates down.”
First, financial markets started the trading day with a crisis tone in the air after regulators took decisive action over the weekend to protect all depositors at California’s Silicon Valley Bank and Signature Bank of New York, including a “systemic risk exemption” for two cited non-systemically important banks.
Markets were so unsettled early on, Buchanan said, that regulators’ actions “went a long way” to protect depositors, but not shareholders or bondholders.
Exception systemic risk refers to the portion of the Federal Deposit Insurance Corporation Improvement Act of 1991 that allows the Secretary of the Treasury, in consultation with the President, to take action to protect uninsured depositors in the presence of systemic risk.
After Black Monday, the stock exchange was also retooled. After the crash, market-wide circuit breakers were put in place to force a 15-minute halt to trading after falls of 7% and 13%, and to close the market for the day after a 20% drop.
Archive: 1987 stock market crash marks its 35th anniversary: what investors can learn from “Black Monday”.
Monday’s initial risk flight still left the S&P 500 financials sector down 3.4% in afternoon trade, according to FactSet data.
Meanwhile, the 2-year monetary policy rate, which ended Wednesday’s New York meeting at 5.011% after two days of hawkish statements from Fed Chair Jerome Powell, briefly fell as low as 3.976% — or more than — on Monday a full percentage point during the last three trading sessions – before narrowing its decline to around 4.1%.
“The move into the Treasury market reflects concerns that government attempts to calm investor fears will not work and that the resulting panic and fear could quickly lead to the dreaded ‘contagion’ affecting the psyche of the market,” Quincy Krosby, chief global strategist for LPL Financial, said before major stock indexes rallied on Monday. “Restoring liquidity in the banking system is easier than restoring confidence and today is clearly about the latter.”
In 1987, the stock market collapsed after investor confidence was eroded by a variety of events, including a larger-than-expected trade deficit, a falling dollar, and rolling sell-offs that coincided with a “triple witching” or situation , in which options expired monthly and futures contracts occurred on the same day. Analysts at the Chicago Fed call the 1987 stock market crash the first global financial crisis in modern times.
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