2023-04-04 19:14:35 ET
Summary
- Bond yields have been dropping since March 8 when the problems at Silicon Valley Bank surfaced.
- The Federal Reserve responded to the problems in the banking sector, but as they did, investors put lots of money into bonds, and bond yields fell.
- Now, the bank crisis seems to be ending and concern is growing that bond yields will begin to rise again.
- Where are things going?
Bond yields dropped as problems were discovered in the banking sector.
March 8, 2023, the day that the troubles at Silicon Valley Bank of SVB Financial Group (SIVBQ) became public, the yield on the 10-year U.S. Treasury note closed at 3.986 percent.
This same yield closed at 3.347 percent on April 4, 2023.
The yield on the 2-year U.S. Treasury note went from 5.062 percent on the earlier date to close at 3.846 percent on April 4.
The March series of bank failures turned the bond market around as investors moved a lot of money into the safety of the government's debt.
Two things seemed to drive this movement.
First, the surprise of the bank failures.
Second, the Federal Reserve's response to the banking problem.
Over a very short period of time, credit investors moved very decisively into government bonds.
The focus before March 8 was on the Federal Reserve and just how high would the central bank raise its policy rate of interest.
From March 16, 2022, the Federal Reserve had raised the effective Federal Funds rate from 0.08 percent to 4.58 percent. This was a very decisive and continuous move.
Could it be that the bank failures would cause the Fed to "pivot" from its program of monetary tightness to one of some ease?
The possibility of more bank failures certainly could cause the Fed to "back off," keeping rates steady or even dropping them to ease the monetary situation.
This possibility along with several other lingering issues, like, for example, the debt-ceiling contest going on in Congress.
Furthermore, the rate of inflation has been dropping, falling to a year-over-year rate of increase of 6.0 percent.
Investors had been leaning to the side of the argument that claimed Fed Chair Jerome Powell would soon back off the pressure to continue to raise the policy rate.
And, so the decline has been consistent with the way some investors have been thinking.
But, now, maybe the banking situation has bottomed out for the time being and maybe the Fed will not "pivot" and "bank off" from its effort to sustain the inflation fight.
Maybe the Fed will continue to follow its planned period of "quantitative tightening" and keep letting securities run off from its securities portfolio.
Just maybe, these bond yields will turn around and begin to climb again as investors move out of bonds.
What if the U.S. economy continues to grow, even modestly?
What if inflation remains above 5.0 percent, substantially above the Fed's target rate of inflation of 2.0 percent.
What if Mr. Powell does not "cave in" to fears of a market crash or some other concerns about market stability?
What if the Fed continues to raise its policy rate of interest one... two... or more times this year?
What if the yield on the 2-year U.S. Treasury note returned to around 5.00 percent?
The future is still up-in-the-air, with radical uncertainty creeping about almost everywhere.
I just think that investors need to beware. It is not a sure thing that U.S. Treasury yields will stay so low or move lower.
There is still plenty of concern that these yields will go higher in the next few weeks and beyond.
For further details see:
What's With Bonds