Traders Rethink Fed's Path as Yields Plunge Most Since 2008.

Government-bond rates decreased to their lowest level since 2008 as traders adjusted their expectations for future Federal Reserve rate increases in response to the bankruptcy of a US bank.

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When traders switched to pricing in a quarter-point rate rise at the Fed's March 21–22 meeting rather than a half-point move, shorter-dated Treasury rates plunged for a second day. By the end of the year, the market had also started pricing in a quarter-point reduction.

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The adjustments came after US employment statistics on Friday showed that job growth outpaced expectations for the 11th consecutive month in February, prompting economists at Barclays Plc to project a half-point increase in March. The mixed data, which also revealed that salaries climbed less than projected, was overshadowed by the fall of SVB Financial Group, which succumbed to the pressures of dwindling deposits and losses on its securities portfolio.

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The two-year Treasury yield briefly decreased by about 30 basis points to 4.57% and finished close to its session low. The yield had its largest two-day decline since 2008, falling by slightly about 50 basis points. Moreover, investors poured money into German short-term debt, which caused those rates to fall dramatically.

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The whipsaw movement in Treasury rates is amazing, and investors will probably want to hold Treasury securities through the weekend, according to Kevin Flanagan, head of the fixed-income strategy at Wisdom Tree Investments.

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Traders reasoned that the Fed could be less inclined to raise rates despite the fact that inflation was still high if there was a risk of contagion in the banking sector. Swaps with the March meeting price are now tightening by around 32 basis points, which is a decrease of roughly 13 basis points from earlier in the week. In recent weeks, the likelihood of a rate drop from the anticipated high level by year's end has decreased to less than a coin flip.

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Investors did anticipate a higher-than-expected payrolls report, according to Andrzej Skiba, portfolio manager at Bluebay Asset Management. "The market's response reflects the larger concern about US banks," he said.

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The parent company of Silicon Valley Bank has seen losses on a portfolio that includes US Treasuries, as investors worried about possible fallout. Investors are focusing on potential vulnerabilities in other financial institutions and debating the extent to which the Fed's rate rises are to blame for this suffering.

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While the Fed reconsiders whether to speed up the pace of rate rises, the US payrolls increased more than expected in February, but a broad indicator of monthly wage growth stalled. As the workforce increased, the unemployment rate increased to 3.6%, and monthly salaries increased at the slowest rate in a year. After a gain of 504,000 in January that was later corrected to 517,000, nonfarm payrolls grew by 311,000.

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Traders will assess whether pricing in a quarter- or half-point increase this month is justified in light of next week's publication of US consumer inflation data.

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Roberto Cobo Garcia, director of G10 FX strategy at BBVA, stated that the market is "clearly interpreting" that the labor data is good but not strong enough for the Fed to re-accelerate the hiking cycle. For the Fed to reverse direction once more, "it would certainly need pretty big surprises in the CPI report next week."

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