Treasury yields fall again as traders factor in full percentage point of Fed rate cuts by December

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U.S. bond yields dived on Wednesday as troubles at Swiss banking giant Credit Suisse reverberated around financial markets and prompted traders to factor in a full percentage point of rate cuts from the Federal Reserve by year-end.

What’s happening
  • The yield on the 2-year Treasury

    dived almost 39 basis points to 3.834% from 4.221% on Tuesday.

  • The yield on the 10-year Treasury

    retreated 20 basis points to 3.432% from 3.633% as of Tuesday, and was headed for its biggest one-day drop since Nov. 10.

  • The yield on the 30-year Treasury

    fell almost 12 basis points to 3.642% from 3.760% late Tuesday afternoon.

What’s driving markets

Treasury yields plunged on Wednesday after the biggest shareholder in Credit Suisse

said it would not invest any more funds in the beleaguered Swiss lender, according to a Bloomberg report. Credit Suisse’s shares dropped to a record low and dragged European banks lower, while triggering a fresh wave of government-bond buying as investors seek safety in sovereign paper.

Credit Suisse’s woes also sparked a fresh wave of selling in a number of U.S. regional-bank shares and once again raised fears that the banking sector remains highly vulnerable to higher interest rates.

Traders now see a better-than-not chance of at least 100 basis points, or full percentage point, of rate cuts by the Federal Reserve by year-end, according to the CME FedWatch tool. They also see now see a 47.6% chance of a pause by the Fed next Wednesday and a 52.4% likelihood of a quarter-point hike, which would take the fed-funds rate target to between 4.75% and 5%.

In addition to the renewed banking angst, data released on Wednesday showed that U.S. retail sales slowed for the third time in four months during February. Sales at retailers fell 0.4% last month — matching the estimate of economists polled by The Wall Street Journal.

Wholesale prices fell 0.1% in February for the second decline in three months, suggesting stubbornly high inflation is showing signs of easing. The month-on-month PPI had been expected to increase 0.3%.

What analysts are saying

“The past week has been fast-moving for policy makers and markets. Focus quickly shifted from the possibility of 50bp Fed hikes to the risk of greater stress in the U.S. banking system and the odds of cuts within the coming months,” said Karen Reichgott Fishman and Sid Bhushan of Goldman Sachs. Their analysis suggests that, at least initially, “markets mostly priced in a dovish Fed shock (and investors de-risked) rather than significant financial stress.” 

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