Ripples of the Silicon Valley Bank collapse continue in the financial world even after government intervention on both sides of the Atlantic.
The two-year Treasury yield fell by 60 basis points on Monday, briefly dipping below 4 per cent. Two-year yields are particularly sensitive to interest rate expectations, and yesterday’s fall was the largest since September 2008. The two-day decline in the two-year yield marked the steepest drop since October 1987.
Part of the fall in yields has been driven by a flight-to-safety in the wake of financial stability concerns. Higher demand for Treasuries pushes up the price, with yields moving inversely. But John Canavan, lead analyst at Oxford Economics, noted on Tuesday that “with the major equity indices higher overall today, that does not appear to explain all of the move”. He added that “a repricing of Fed rate expectations” is also fuelling the shift.
As late as last week, markets expected US interest rates to stay higher for longer as strong economic data prompted hawkish comments from US Federal Reserve chair Jerome Powell. Before the SVB crisis, markets were pricing in a peak US interest rate of 5.75 per cent in September.
But the wider stability concerns triggered by the collapse of SVB mean that the Fed will have more on its mind than just inflation when it meets next week. Economists at Capital Economics said on Monday that the episode “may limit the extent of further interest rate rises and the length of time for which rates need to stay at their peaks”.
They added that “it makes sense for central banks to become more cautious and less willing to pledge or signal another series of rate hikes” in light of the crisis. Market pricing now indicates that rates will peak around 4.8 per cent in May, with cuts following by September.
At the same time as the two-year yield plummeted, investors bought up gold. The World Gold Council reported net gold ETF inflows of $760mn (£626mn) on Monday, compared to an outflow of over $500mn in the week to 10 March. The price climbed 2.4 per cent in response, to over $1,900 an oz for the first time since February. The one-day climb was the sharpest one-day rise since November.
