(Bloomberg) — Treasury yields tumbled Thursday as a second day of declines for US financial stocks led traders to price in a more rapid pace of Federal Reserve interest-rate cuts.
Most Read from Bloomberg
The US five-year yield fell as much as 9 basis points to 3.75%, the lowest since June. At the same time, traders priced in a larger total amount of Fed interest-rate cuts this year. Swap contracts indicated a slightly increased possibility of a March start, a day after that wager suffered a setback when Fed Chair Jerome Powell said it was unlikely.
Bank shares extended a decline that was sparked Wednesday by a small New York bank reporting a surprise loss and cutting its dividend — fallout from US commercial property losses that are expected to deepen. For investors, it evokes the rout in US regional bank shares last March that also drove haven demand for Treasuries.
While the scope of the problem is uncertain, “it negatively impacts banking lending, the lifeblood of our economy,” said Jack McIntyre, portfolio manager at Brandywine Global Investment Management. “Investors are buying Treasuries first, ask questions later.”
Banks that had predicted cuts would begin in March were abandoned that call after Wednesday’s Fed policy meeting.
Still, swap contracts that predict the outcome of future Fed meetings are priced for about 150 basis points of easing this year, with the first move fully priced in for May.
Some investors are concerned that the longer the Fed delays the rate cuts, the more risks the economy will slow and inflation may undershoot the Fed’s 2% target.
“If the ultimate outcome is that the Fed is resisting a rate cut the economy needs, we will see stress on market conditions and long yields fall,” Tim Duy, chief U.S. economist at SGH Macro Advisors, wrote in a note.
New York Community Bancorp tumbled as much as 15% on Thursday, extending its record 38% plunge Wednesday when it announced losses. The firm’s results sparked broader concerns about other small lenders’ exposure to the commercial real estate market. The KBW Regional Banking Index extended its two-day drop to as much as 11%, the most since March.
The renewed banking concern came just one month before the Fed is scheduled to wind down an emergency funding program for lenders. Launched during the banking crisis in March, the Bank Term Funding Program, allows banks and credit unions to borrow funds for up to one year, pledging US Treasuries and agency debt as collateral valued at par. The facility is set to close on March 11.
Despite the banking woes, the broad equity market is holding up with the S&P 500 Index gaining 0.4% for the day.
Earlier Thursday, data showed that US labor productivity advanced at a rapid pace in the fourth quarter, while the unit labor costs increased less than economists forecast. Meanwhile, a measure of US factory activity climbed to a 15-month high at the start of the year.
The moderate labor costs solidified the market’s expectation that rate “cuts are coming, even if growth remains strong,” said Gennadiy Goldberg, head of US interest-rates strategy at TD Securities.
(Adds comment and additional market activity.)
Most Read from Bloomberg Businessweek
©2024 Bloomberg L.P.