It’s a risk that seemed to come out of nowhere this week, jolting financial markets out of the focus on inflation and once again shaking up expectations for another Federal Reserve interest-rate hike later in March.
Regional-bank solvency concerns, triggered by financial woes at California-based Silicon Valley Bank SIVB, , are raising questions about whether a broader financial crisis may be in the works and put pressure on financial-sector shares on Friday.
Analysts described the bank’s problems as one of the consequences of the Federal Reserve’s ongoing interest rate rises, by imperiling the value of Silicon Valley Bank’s bond portfolio and triggering the need to raise cash, albeit at a $1.8 billion loss.
Rightly or wrongly, financial markets are back to hoping that policy makers won’t need to resume an aggressive pace of rate hikes, despite Fed Chairman Jerome Powell’s hawkish message to Congress this week and a major U.S. inflation update that’s still due next Tuesday.
Fed funds futures traders priced in a 50.2% chance of another quarter-of-a-percentage-point rate hike by the Federal Reserve, up from 31.7% a day ago. In addition, they reduced the likelihood that policy makers will lift borrowing costs toward 6% this year and factored in a decent chance of a rate cut by year-end.
Contagion fears stemming from Silicon Valley Bank first triggered a flight to the safety of Treasurys on Thursday. That trade continued overnight and into Friday — sending the policy-sensitive 2-year rate TMUBMUSD02Y, 4.615% toward its biggest two-day decline since 2008.
The debate now taking place within the bond market is whether the fallout from Silicon Valley Bank is too small to have a broader impact, or if the bank represents more of a proverbial “canary in the coal mine” indicating that other banks are also in trouble which might put political pressure on the Fed to stop hiking. The Fed has already raised the fed funds rate target by 450 basis points over the past year, to between 4.5% to 4.75%. A quarter-point rate hike on March 22 would take the target to between 4.75% and 5%.
“From the Fed’s perspective, this [the Silicon Valley Bank case] could give policy makers reason to take a more cautious approach,” said Gregory Faranello, head of U.S. rates at AmeriVet Securities in New York.
The regional bank’s troubles overshadowed what was supposed to be the bigger market-moving development on Friday: the U.S. nonfarm payrolls report for February, which produced a stronger-than-expected 311,000 job gains.
All three major U.S. stock indexes DJIA, -1.24% SPX, -1.59% COMP, -1.91% were lower in the afternoon, after briefly turning higher in late-morning trading. Treasury yields plunged, with the 2-year rate dropping 21 basis points to below 4.7%, after earlier declining by 27.6 basis points on its way to the biggest two-day drop since Sept. 29, 2008, according to Dow Jones Market Data.
Read: Recession or not? The bond market is screaming one thing, but pricing in something else
This article was originally published by Marketwatch.com. Read the original article here.