Global bond markets have declared that the steepest global monetary tightening campaign in a generation is as good as done.
Benchmark short-end bond yields have crashed below their economy’s cash rates across most of the developed world in the few sessions since the collapse of Silicon Valley Bank.
US two-year yields led the way with their biggest rally since the 1980s, tumbling more than a percentage point over the previous three days as traders moved to price in two Federal Reserve rate cuts within six months. Similar-dated yields across every developed-market economy outside Japan all dropped at least 39 basis points.
The first US bank failure since 2008 has turbocharged concern that policymakers’ efforts to quash inflation — led by the Fed’s 4.5 percentage points of rate hikes in the space of a year — will tip economies into recession. It has also scuttled bets on next week’s Fed meeting, which had been seen as a sure-fire hike of at least 25 basis points just days ago.
Goldman Sachs Group Inc. now expects the Fed to hold at its March 21-22 meeting, while Nomura Securities went a step further and forecast a cut and a halt to bond sales. The Blackrock Investment Institute, in contrast, says the Fed will press on with its hiking campaign to combat inflation.
Swaps traders are still betting on a rate increase in either March or May, followed by a reversal in June. The central bank target rate is expected to come down to about 3.9% by year-end, from its current range of 4.5% to 4.75%, the contracts show.
The bond market repricing continued Tuesday, with Australian three-year yields dropping 25 basis points to 2.96%, some 64 basis points below the Reserve Bank of Australia’s cash-rate target. That’s the widest discount since 2012, when the RBA was busy cutting interest rates.
Swaps traders have now priced out further hikes for the RBA and see a chance of a rate cut by July.
German two-year bund yields dropped 41 basis points on Monday to 2.69%. That still left them as the only key short-end yield above the relevant cash rate.
The European Central Bank now stands as the leading hawk among global policymakers, according to swaps traders, who see it raising rates by 75 basis points within six months. Still that is about half the hiking pace seen last week.
But there too, the path isn’t certain. The ECB’s plans for more big rate hikes are set to meet stronger opposition this week after the collapse of SVB, according to officials with knowledge of the matter.
At the same time, it won’t be a one-way move. US two-year yields climbed back seven basis points to 4.05% in Asian trade after tumbling 61 basis points Monday.
The rally in US short-dated debt Monday meant a dramatic re-steepening in the yield curve — a phenomenon widely regarded as signaling a recession is imminent. The spread between US two- and 10-year yields is still inverted, but it jumped by 48 basis points on Monday, the most since January 2001, just two months before the official start of a recession that lasted through November of that year.
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