2-Year U.S. Treasury yields drop sharply since Volcker era after bank failures

The volatility in short-term U.S. short-term interest rates on Thursday was unlike anything seen in the past 40 years, including during the 2008 financial crisis and the 9/11 attacks.

Two-year U.S. Treasury yields fell about 61 basis points (bp, 1 bp = 0.01%) on the day. It was the biggest one-day decline since the early 1980s, when Paul Volcker headed the Federal Reserve as chairman, and surpassed Black Monday in 1987. At one point, it fell 65 basis points to 3.935%.

This is because the US government has set up a new lending system in response to the bankruptcy of several banks, and the market has fundamentally reconsidered the direction of monetary policy.

Yields on two-year bonds fell for the third consecutive day. The decline during this period exceeded 1 point. Demand for U.S. Treasury bonds of all maturities surged as U.S. bank stocks continued to shy away from U.S. bank stocks even after U.S. regulators announced a deposit protection package late Wednesday night.

A look at swap deals related to the Federal Open Market Committee (FOMC) meeting schedule showed that as of last week a 0.5 percentage point rate hike was likely at next week’s meeting, but since then the Federal Funds (FF) interest rate target has been pushed back to the current level. Expectations of a move up from the 4.5-4.75% range have receded significantly. With a less than 50% chance of a rate hike at the March meeting, the market sees the peak of the cycle at most 0.25 percentage points above current levels.

Futures linked to the rest of the year’s meetings, meanwhile, show that the policy rate could peak in May and then cut by almost a percentage point by the end of the year.

“The Fed wanted to tighten financial conditions, but they didn’t want it to be chaotic,” said Priya Misra, global head of rates strategy at TD Securities. It makes sense,” he said.

Misra, however, said it was difficult to envision a rate cut as inflation continued to rise. February’s consumer price index (CPI), a key inflation indicator, is due to be released on Thursday.