Analysis-As banks fail, markets hear the sound of spike rates

By Tom Westbrook

SINGAPORE (Reuters) – Investors rushed to lower expectations for global rates on Monday and ditched bets on sharp U.S. rises next week, saying the biggest U.S. bank failure since the financial crisis will give policymakers pause. twice.

On Sunday, the US administration took emergency measures to bolster bank confidence, guaranteeing deposits after withdrawals overwhelmed Silicon Valley Bank and shutting down pressured lender Signature Bank in New York.

But as equity futures rose in relief, bond markets opened in Asia with a frantic race to reassess rate expectations on the belief that the Federal Reserve may be hesitant to raise next week as the he atmosphere is feverish and delicate.

U.S. interest rate futures surged and a tough rally in short-term bonds extended, putting two-year Treasuries on course for their best three-day gain since Black Monday in 1987.

Banking stress and the resulting collapse of loan portfolios means higher borrowing costs, said Akira Takei, bond portfolio manager at Asset Management One in Tokyo, with the resulting strain on the real economy making new difficult rises.

“If (US Fed Chairman Jerome) Powell raises interest rates next week, he will put this in jeopardy,” he added. “If they don’t prioritize financial stability, it will (bring) financial instability and recession.”

A Sunday endnote from Goldman Sachs, in which bank analysts said banking stress meant they no longer expected the Fed to raise rates next week, gave the rate rally an extra leg during the Asian session.

Two-year yields were last down nearly 20 basis points and have fallen nearly 70 basis points since Wednesday.

At 4.4098%, they are also below the lower end of the federal funds rate window at 4.5% – a sign that markets see that the peak in rates is near. The latest futures prices imply nearly a 20% chance of the Fed holding next week and an 80% chance of a 25 basis point hike – a huge change from last week when markets sagged. are prepared for a 50 basis point hike.

“I think people are equating the problems at Silicon Valley Bank with the rate hikes we’ve had before,” said ING economist Rob Carnell.

“If the rate hike caused that, the Fed will factor that into the futures,” he said. “He’s not going to want to come in with another 50 basis point hike and see another financial institution get sprayed.”


Monday’s early moves also pulled strongly forward and lowered market expectations for a peak in rates. From around 5.7% on Wednesday, prices implied for the peak in US rates were testing 5% on Monday and year-end expectations – above 5.5% last week – have fallen to around 4.7 %, a drop of about 80 basis points in a few days.

There were also rallies in Australian and European interest rate futures, which rarely move much in Asia as traders believe global policymakers are getting cautious.

The scale of the changes prompted warnings from analysts who said they could relax quickly, especially if U.S. inflation data is hot next week. Longer-term bonds were also left behind, with inflation a higher risk if the rises slowed or stalled.

“The market, particularly in the Asian time zone, continues to digest the news about the SVB falling,” said Jack Chambers, senior rate strategist at ANZ Bank in Sydney.

“In fact, the support for deposit holders supports the idea that the Fed could continue to tighten policy,” he said, if the measures could limit the problems to a few banks.

Still, a new Fed Bank funding program aimed at addressing some of Silicon Valley Bank’s apparent problems with losses in its bond portfolio should further contribute to bank and bond stability.

Banks will now be able to borrow from the Fed against collateral such as Treasury bills at par, rather than at market value, which will greatly reduce the need for banks to liquidate bonds to meet unexpected drawdowns.

(Reporting by Tom Westbrook. Editing by Sam Holmes)

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