By Wayne Cole
SYDNEY, March 14 (Reuters) – Treasury bonds stabilized in Asia on Tuesday as investors digested the biggest bond boom in three decades and a radically changed outlook for interest rates, with futures holding the chance of policy easing as early as May priced in July.
Global markets have been tumultuous since US lender Silicon Valley Bank collapsed last week, and concerns about contagion intensified after Signature Bank shut down over the weekend.
Analysts at Nomura even predicted the Federal Reserve would cut rates at next week’s meeting, in a stunning reversal given policymakers had announced a hike of up to half a point.
“We expect a 25 basis point rate cut and halt to balance sheet contraction in March while a new credit facility is possible,” they wrote in a statement.
That was a step ahead of Goldman Sachs, which spurred a major rally on Monday by forecasting the Fed would halt tightening on March 22 but would tighten further in May, June and July.
Futures are still poised for a quarter point hike next week to 4.75-5.0%, albeit with a 27% chance of no move at all. A week ago, the market was heavily betting on a 50 basis point rise and a peak between 5.5% and 6.0%.
Now, futures are implying a 4.83% ending rate and a cut to 4.30% in July, with 3.96% priced in at the end of the year.
The sharp reversal reflects investors’ concerns that the collapse of several US banks will lead to painful tightening of lending conditions and a credit crunch.
“That increases the risk of the economy suffering a harder landing, which would accelerate the necessary disinflationary adjustment,” wrote analysts at Capital Economics.
“In these circumstances, it makes sense that futures markets now expect little additional rate hikes from the Fed and instead see rate cuts later this year.”
It was this risk that caused two-year bond yields to fall nearly 61 basis points on Monday, marking the largest single-day drop since the 1987 stock market crash.
The story goes on
The sheer magnitude of the move pushed yields up 12 basis points to 4.109% on Tuesday, although that’s a world away from last week’s peak of 5.085%.
10-year bond yields remained at 3.569% after falling 13 basis points on Monday as the upside curve steepened.
Traders were cautious if US consumer price (CPI) data due later in the session surprised on the high side and increased pressure on the Fed to continue tightening. Jan Nevruzi, a bond analyst at NatWest Markets, said they were forecasting an upside surprise for the CPI reading, but the data has been overtaken by events.
“We now expect a pause in rate hikes and QT at the March meeting,” he added.
“The reason is that while inflation is still a major concern, risks to financial stability may take precedence in the near term – and any strong data could be viewed as old news.”
(Reporting by Wayne Cole; Editing by Muralikumar Anantharaman)
Comments are closed.