By Ketki Saxena
Investing.com – Bond markets are dramatically repricing future rate moves by central banks in the wake of the Silicon Valley Bank failure and bailout, including from the Federal Reserve and the Bank of Canada.
Swaps-based probabilities of future moves by the Bank of Canada now suggest a quarter-point cut at its next meeting on April 12, and at least 50 basis points of interest rates cuts by this summer.
Prior to the news emerging of the the SVB collapse, money markets were pricing in a quarter point hike from the Bank of Canada by mid year.
The repricing of Bank of Canada moves was supported by a slide in bond yields, especially in shorter term bonds, such as the Canada 5-year bond yield which is highly influential on fixed mortgage rates.
The 5 year yield was down nearly 9% today to 2.918%, while the 2 year fell over 10% to 3.568%. The U.S. 2-year treasury yield meanwhile is set for its biggest one day fall since 2008.
At 4.128%, U.S. two-year yields are below the bottom end of the Fed funds rate window at 4.5% - a clear sign markets see rates’ peak is near.
The latest futures pricing implies a near 40% chance the Fed holds rates next week and an 60% chance of a 25 bp hike . The expectation marks a huge shift from just last week when markets braced for a 50 bp hike.
The move in US treasuries, and worries of a 2008-2009 like crisis also has analysts cutting bets on Fed forecasts. In a late-Sunday note from Goldman Sachs (NYSE:GS), the banks’ analysts said the banking stress meant they no longer forecast the Fed to hike rates next week.Cr
ING economist Rob Carnell meanwhile notes, “I think people are linking Silicon Valley Bank’s problems with the rate hikes we’ve already had”.
“If rates going up caused this, the Fed is going to mindful of that in futures,” he said. “It’s not going to want to go clattering in with another 50 (bp hike) and see some other financial institution getting hosed.”