SVB Crisis Slums Treasury Liquidity as Moody’s Fed Outlook

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(Bloomberg) — Liquidity is evaporating in the world’s largest market as the US banking crisis worsened the Federal Reserve’s monetary policy outlook.

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Two-, 10- and 30-year US government yields rose to their highest levels in at least six months on Tuesday, according to data compiled by Bloomberg. The 10-year yield moved into a 34-basis point range on Monday, the biggest gap since the start of the pandemic in 2020.

“Amidst late-cycle dynamics, an aggressive Fed, strong data and contagion risks, these risks are proving hard to stomach,” said Eugene Leo, a senior rate strategist at DBS Bank Ltd. in Singapore. He added that the wide bid-ask spread indicates high volatility which is making market participants cautious.

The drop in liquidity amid uncertainty about the Fed’s rate-hike path following the collapse of three US lenders underscored the damage done by higher borrowing costs. Volatility risks are spreading to other assets that use Treasuries as a benchmark, with traders fearing a wider US banking crisis could ensue.

Intercontinental Exchange Inc. Data showed a gauge of implied volatility in Treasuries rose to the highest level since 2009 this week. US authorities moved swiftly to guarantee deposits at the Silicon Valley bank and provide lenders with short-term loans but some analysts are cautious of further volatility.

“It is too early to think that the US banking turmoil is over,” said Kiyoshi Ishigane, chief fund manager at Mitsubishi UFJ Kokusai Asset Management Co. re.”

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