Bond market pricing in 50-50 chance Fed won’t hike rates at all this week


Treasury yields finished higher on Monday, with the 30-year rate posting its biggest jump in an almost a week, as traders focused on the likelihood that the Federal Reserve will likely raise rates again in two days despite banking-industry concerns.

What happened
  • The yield on the 2-year Treasury TMUBMUSD02Y, 3.990% advanced 7.6 basis points to 3.922% from 3.846% on Friday. Yields move in the opposite direction to prices.
  • The yield on the 10-year Treasury TMUBMUSD10Y, 3.485% rose 8.2 basis points to 3.477% from 3.395% as of Friday.
  • The yield on the 30-year Treasury TMUBMUSD30Y, 3.671% jumped 6 basis points to 3.660% from 3.6% Friday afternoon. That’s the largest one-day jump since last Tuesday.
What drove markets

Lingering concerns about the health of the global banking system saw investors pile into sovereign bonds early Monday. The sight of Credit Suisse’s AT1 bond holders having their billions in investment wiped out as part of the bank’s takeover by UBS added to the attraction of government paper. These bonds, also called contingent convertible bonds, or CoCos, have been a key funding source for European banks.

But during New York trading, the direction of Treasury yields reversed and shifted higher. That’s because traders focused on the likelihood that the Federal Reserve will hike rates on Wednesday and again in May. They priced in a 73.1% probability that the Fed will lift the fed-funds rate target by a quarter of a percentage point — to between 4.75% and 5% — in two days, according to the CME FedWatch tool. In addition, traders see a 42.2% chance of another quarter-point hike in May, up from 20.7% on Friday, according to fed-funds futures.

Sovereigns were bought across the board earlier on Monday. The German 10-year bund yield TMBMKDE-10Y, 2.119% was 2.119% after touching the lowest level this year, while its French peer TMBMKFR-10Y, 2.656% slipped 3.8 basis points to 2.656%.

What analysts are saying

“Three difficult issues confront policy makers and markets this month,” said Jim Vogel, executive vice president at FHN Financial in Memphis. One is that the actions taken to address individual bank problems have undermined the value of the securities and systems that support all banks, he wrote in a note. The second is that “in previous market distress, households moved their assets into banks because they were a safe haven [and banks] were the right kind of anchor, but not today. And third is that looser monetary policy “has been a valuable step in previous distress episodes … again, not available today.”

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