Treasuries Soar as Bank Stocks Slump

On Friday, US Treasuries enjoyed a rally, and yields tumbled as investors sought safety amid a sell-off in bank stocks. The mixed labor market report, which eased fears the Federal Reserve would raise interest rates by half a percentage point at its meeting later this month, also contributed to the rally. As a result, bond prices rose, sending yields on benchmark 10-year Treasury notes down 0.23 percentage points to 3.68 percent – their lowest in almost a month and a sharp reversal from trading above 4 percent earlier in the week. The yield on the two-year note, which is more sensitive to interest rates, fell 0.32 percentage points to 4.58 percent.

The level of uncertainty is very high at the moment, according to Kavi Gupta, co-head of rates trading at Bank of America. Some momentum-focused investors were likely to have covered short positions in bonds built on the expectation of a more hawkish stance by the Fed. Stocks on Wall Street declined for a second day in volatile trading, dragged down by broad losses for banks’ shares following fears that the failure of tech-focused Silicon Valley Bank, which was put into receivership on Friday, could be a sign of broader woes in the sector. The S&P closed down 1.5 percent, taking its losses to 4.5 percent, the worst week in almost six months. The tech-heavy Nasdaq Composite ceded 1.8 percent on the day and 4.7 percent lower for the week – the poorest week since early November.

Employment Report Highlights Mixed Data Message

Investors were left weighing the merits of the banking drama against signals from a closely-watched monthly US employment report, which showed the economy added 311,000 new jobs in February, far above market expectations of 225,000. However, wage growth slowed to 0.2 percent from January, while a separate survey reported a more than forecast unemployment rate rise to 3.6 percent. The data could ease pressure on the Fed to use bigger interest rate rises to curb inflation.

CME Group’s FedWatch tool implied investors were pricing in a 64 percent likelihood of a quarter-point rise at the Fed’s March 21-22 meeting. On Thursday, there was a 68 percent probability of a half-point move. “The mixed message from the February jobs report makes the upcoming Fed meeting a close call, but we are sticking with a [quarter-point] hike for now,” said Michael Feroli, an analyst at JPMorgan.

Global Markets React

The dollar index, which measures the greenback against a basket of six peer currencies, fell 0.7 percent. European markets were also lower. The region-wide Stoxx 600 closed down 1.4 percent, hit by falls in bank stocks such as Deutsche Bank and Société Générale. The Stoxx bank index lost 3.8 percent. London’s bank-heavy FTSE 100 ended down 1.7 percent. Hong Kong’s Hang Seng index was down 3 percent in Asia, China’s CSI 300 shed 1.3 percent, South Korea’s Kospi declined 1 percent, and Japan’s Nikkei 225 lost 2.5 percent.

Related Facts

• The yield on 30-year treasuries fell to the lowest level since 20 February
• 10-year treasury yields fell a total of 9 basis points in the week, the most since the end of January
• Markets are worried about the health of Germany’s Deutsche Bank, which saw its shares decline by as much as 5 percent on Friday

Key Takeaway

The mixed labor market report and fears surrounding the failure of tech-focused Silicon Valley Bank have led to a sell-off in banking stocks and a rally in Treasuries. Markets continue to be uncertain about the upcoming Fed decision on interest rate rises.

Conclusion

As global markets react in a sell-off of banking stocks, investors may feel confused and uncertain about the future. Unfortunately, there are no clear answers at this stage, and investors will need to wait and see what decisions the Fed makes at its upcoming meeting later this month.