Fed's Path Re-Evaluated As Yields Plunge

Traders adjusted their expectations of future Federal Reserve rate increases in response to the bankruptcy of a US bank in response to an adjustment in expectations regarding future rate increases for government bonds, which decreased to their lowest level since 2008.

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After traders switched to pricing in a quarter-point rate hike at the Fed's meeting on March 21–22, rather than a half-point increase, short-dated Treasury rates plunged for a second day, as a result of the Fed's move. Market participants began to price in a quarter-point reduction by the end of the year as well.

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The adjustments were made after US job growth increased for the 11th straight month in February, putting an end to a nine-month streak of underestimating expectations, which has led economists at Barclays Plc to predict a half-point increase in March. Mixed data also revealed that salaries did not rise as much as projected, but this was overshadowed by the fall of SVB Financial Group, which was unable to bear the pressures of declining deposits and losses on its securities portfolio due to dwindling deposits.

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The yield on the two-year Treasury note briefly decreased by about 30 basis points to 4.57% at the end of the session and finished close to its low for the day. This is the largest two-day decline in the yield since 2008, and the yield has declined by about 50 basis points in the last two days. Moreover, investors poured money into German short-term bonds, resulting in a dramatic drop in the rates of those bonds.

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As a result of the whipsaw movement in Treasury rates during the past few days, investors are likely to want to hold Treasury securities through the weekend, according to Kevin Flanagan, Director of Fixed Income Strategy at Wisdom Tree Investments.

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If there is a risk of contagion in the banking sector, traders reasoned, the Fed might be less inclined to raise rates despite the fact that inflation is still high despite the fact that inflation continues to rise. It is now clear that swaps with the price of the March meeting are tightening by about 32 basis points, which is a drop of about 13 basis points from earlier in the week. During recent weeks, the chances of a drop in interest rates from the anticipated high level by the end of the year have decreased to less than a coin flip over the next few months.

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According to Andrzej Skiba, portfolio manager at Bluebay Asset Management, investors did anticipate that the payroll report would be higher than expected, based on the initial report. In his view, the market's reaction to the announcement is a reflection of a larger concern about the US banks.

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Silicon Valley Bank's parent company experienced losses on a portfolio of US Treasuries, as investors worried about possible consequences. Currently, investors are focusing on potential vulnerabilities in other financial institutions and debating the extent to which the Fed's rate hikes are to blame for this turmoil.

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A broad indicator of monthly wage growth in the US has stalled, despite the Fed examining whether to speed up the pace of rate hikes while US payrolls increased more than expected in February. The unemployment rate jumped to 3.6% as the workforce grew, and salaries are rising at the slowest rate in a year as a result of the increased labor force. As a result of a gain of 504,000 nonfarm payrolls in January that was later corrected to 517,000, the number of nonfarm payrolls grew by 311,000 in February.

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As traders prepare for the publication of US consumer inflation data next week, they will determine whether the assumption of a quarter- or half-point increase this month is justified.

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BBVA's Roberto Cobo Garcia, who heads the firm's G10 FX strategy, commented in an interview with Trade Algo that “there is a clear interpretation among the market that the labor data is good, but not strong enough for the Fed to re-accelerate the rate hike cycle. As a result of the CPI report expected to be released next week, it would certainly be necessary for the Fed to reverse direction once more.”