By
Bhushan Akolkar
April 17th, 2024
The 2-year and 10-year Treasury yields rose Tuesday as investors pondered the next Fed interest rate hikes.
Treasury yields recently climbed amid investor interest rate assessment ahead of pivotal inflation data. On Tuesday, investors and analysts weighed the outlook for Federal Reserve interest rate hikes following Silicon Valley Bank’s collapse.
By 5 am Eastern Time, the 10-year Treasury yield was up approximately seven basis points to 3.5827%. The 2-year Treasury yield also rose by more than 15 basis points to 4.1857% around the same time. The yield on the 2-year Treasury had fallen 59 basis points on Monday to record the largest three-day drawdown since the ’87 stock crash.
Treasury Yields Interest Rate Development Comes on Heels of Silicon Valley Bank Collapse
The aftermath of Silicon Valley Bank’s bankruptcy continues to weigh heavy on markets alongside the Treasury yields interest rate development. Bond yields dropped as prices surged on Silicon Valley Bank’s collapse. This development also triggered broader fears regarding the banking sector’s performance. As a result, numerous investors have opted for traditionally safer assets such as government bonds.
Investors were unsure about future monetary policy by the Federal Reserve following Silicon Valley Bank’s collapse. The Santa Clara-based bank had an unusually high percentage of uninsured deposits at the time of its demise. However, Citi analyst Keith Horowitz reckons that other mid-sized banks are at risk of large withdrawals following the Silicon development. In a cautionary note to clients, Horowitz said:
“We believe regionals with less diversified and large uninsured deposit bases are at risk of deposit flight but not at the speed of Silicon Valley Bank, and they should have time to tap wholesale funding markets, like FHLB, and increase cash levels. In a fragile environment like we are in, we believe banks should be cautious about the potential negative signaling effect of increasing deposit rates to keep deposits.”
Despite Silicon Valley Bank’s collapse, investors anticipate that the US apex bank would increase rate hikes again, starting with a 50-basis point increment. The Federal Open Market Committee’s (FOMC) next fiscal meeting takes place on March 21st and 22nd.
However, some economists also believe that the Fed could pause rate hikes for now or resort to lower rate increases. This includes announcing another 2-basis-point hike similar to the decision taken at the last FOMC meeting.
Fed Chair on Future Rate Hikes
Last week, Fed Chair Jerome Powell suggested that rates could stay higher than previously anticipated for longer. As Powell explained at the time:
“The latest economic data have come in stronger than expected, which suggests that the ultimate level of interest rates is likely to be higher than previously anticipated. If the totality of the data were to indicate that faster tightening is warranted, we would be prepared to increase the pace of rate hikes.”
According to Powell, such a potential course of action depends on economic data readings. The Fed Chair’s statement came amid general market optimism that the apex bank could rein in inflation without compromising the economy.