US stocks, bonds rally as markets flirt with Fed pause

  • US authorities are working to stabilize banks
  • Markets anticipate less aggressive Fed hikes
  • Short-term Treasuries fall, Fed futures rise

SYDNEY, March 13 (Reuters) – U.S. stock futures rallied in Asian trade on Monday as officials announced plans to contain the fallout from Silicon Valley Bank’s (SVB) decline, while investors held off on a rate hike this month.

The dollar fell as Goldman Sachs predicted the U.S. Federal Reserve would not raise interest rates next week, marking the biggest rally for short-term Treasuries since 1987.

The wild sea change in markets came after depositors at SVB ( SIVB.O ) said they could access their deposits on Monday after the central bank and the U.S. Treasury announced several measures to stabilize the banking system.

The central bank said it would make additional funding available through a new bank term financing program, which would provide loans of up to one year to depository institutions, backed by Treasuries and other assets held by these institutions.

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A second bank failure came within days as authorities seized New York-based Signature Bank ( SBNY.O ).

Crucially, analysts noted that the Fed would accept collateral instead of marking it to market, allowing banks to borrow without selling assets at a loss.

“These are strong moves,” said Paul Ashworth, head of North American economics at Capital Economics.

“Rationally, this should be enough to prevent any contagion and over-banking that could happen in the blink of an eye in the digital age,” he added. “But the pandemic is always about irrational fear, so we would emphasize that there is no guarantee that this will work.”

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Investors sent US S&P 500 stock futures up 1.8%, while Nasdaq futures rose 1.9%. EUROSTOXX 50 futures were up 0.4% and FTSE futures were up 0.1%.

MSCI’s broadest index of Asia-Pacific shares outside Japan ( .MIAPJ0000PUS ) rose 1.3%, helped by gains in China.

Chinese blue chips (.CSI300) added 0.8% after Beijing surprised the central bank chief and finance minister in their posts on Sunday, prioritizing continuity as economic challenges loom at home and abroad.

Japan’s Nikkei (.N225) was trading down 1.6%, while South Korea (.KS11) rose 0.3%.

A new headache for central banks

Concerns about financial stability have investors speculating that the Fed is now reluctant to rock the boat by raising interest rates by a super-sized 50 basis points next week — and not even that much.

Fed Fund futures priced in any chance of a half-point hike, compared with 70% before the SVB news emerged last week. Instead, futures represent an 18% chance.

The implied peak for rates fell to 5.06% from last Wednesday’s peak of 5.69%, and markets returned to pricing in rate cuts by the end of the year.

“In light of the pressure on the banking system, we do not expect the FOMC to offer a rate hike at its next meeting on March 22,” analysts at Goldman Sachs wrote.

“We have left unchanged our expectation that the FOMC will deliver 25bp hikes in May, June and July, and now expect a terminal rate of 5.25-5.5%, although we see considerable uncertainty along the path.”

Such talk, coupled with a shift to safety, saw yields on two-year Treasuries fall another 22 basis points to 4.36%, a world away from last week’s peak of 5.08%.

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In fact, yields are now down 71 basis points over three sessions, a level not seen since the Black Monday market crash of 1987.

However, the curve steepened as long-term yields rose and inflation became a clear concern.

Depending on what U.S. consumer price data reveals on Tuesday, a higher reading is an obvious risk of piling pressure on the central bank, even as the financial system is in crisis.

The European Central Bank meets on Thursday and is still widely expected to raise rates by 50 basis points and tighten further, although it must now take financial stability into account.

In currency markets, the dollar fell 0.9% to 133.78 against the safe-haven Japanese yen and 0.6% against the Swiss franc. The euro rose 0.8% to $1.0735 as short-term U.S. yields fell.

Gold rose nearly 1% to $1,885 an ounce on Friday, up 2%.

Oil prices edged higher, with Brent adding 20 cents to $82.98 a barrel and U.S. crude up 26 cents to $76.94 a barrel.

Reporting by Wayne Cole; Editing by Sam Holmes and Jacqueline Wong

Our Standards: Thomson Reuters Trust Principles.

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