U.S. yields advance in light trading on Fed rate hike view
By: Gertrude Chavez-Dreyfuss
U.S. Treasury yields rose on Monday in holiday-thinned trading, as investors continued to price in a 25 basis-point hike by the Federal Reserve at next month’s policy meeting following a still strong U.S. jobs report that offset other weak economic data released earlier last week. Volume was light with many European and UK markets closed for Easter Monday. Market participants said overnight volume in Treasuries was roughly about 30% of the average.
“If you listen to the Fed and you look at the pricing, it is plausible that the Fed tighten again in May,” said Gregory Faranello, Head of U.S. Rates at AmeriVet Securities in New York. “But in our view, if we tighten again in May, they probably signal a pause for now, but not necessarily a pivot. And the market wants a pivot,” he added. Friday’s U.S. non-farm payrolls report showed an increase of 236,000 jobs last month, while data for February was revised higher to show 326,000 jobs were added instead of the 311,000 reported previously. Economists polled by Reuters had forecast non-farm payrolls rising 239,000 in March. Prior to that jobs data, the rate futures market had been betting that the Fed would pause at the May policy meeting. On Monday, the market has priced in a 70% chance the Fed will raise interest rates by 25 bps even as multiple rate cuts have also been factored in by the end of the year. In late morning trading, the yield on 10-year Treasury notes was up 4.7 bps at 3.430%. U.S. 30-year Treasury bond yields rose 3.8 bps to 3.641%.
A closely-monitored part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year Treasury notes deepened its inversion to -61.4 bps and was last at -58.0 bps. U.S. two-year yields, which tend to reflect interest rate expectations, climbed 3.6 bps to 4.008%. Bond investors continue to monitor the state of the banking system, with signs that financial stress was easing. Fed data on assets and liabilities of U.S. commercial banks showed over the last week that deposits at all commercial banks rose to $17.35 trillion in the week ended March 29, on a nonseasonally-adjusted basis, from a downwardly revised $17.31 trillion a week earlier. It was the first increase since the start of March and a temporary reversal, at least for now, from a record flight of deposits triggered by the collapses of Silicon Valley Bank and Signature Bank toward the middle of last month Deposit rates, with the current average savings rate at roughly 0.2% per annum, have not kept up with the surge in the fed funds rate that came with multiple Fed hikes. That low deposit rate has led to deposit outflows. Deposits started to decline since the second quarter of last year, That said, bank borrowings from the Fed eased last week. Total lending to the three main programs aimed at bolstering bank liquidity stood at $323.3 billion as of Wednesday last week, down from $332.7 billion on March 29.
“It’s not clear that the banking issues have gone away. At the same time, the Fed has come in and tried to separate financial stability issues from monetary policy,” said Amerivet’s Faranello. “The money the Fed injected into the banking system is not going to flow out into credit creation. That is just to glue the whole thing together. When you put that in the blender, there’s expectation of a recession.”