To The Moon

Investors swarmed into U.S government bonds Monday after the collapse of Silicon Valley Bank and subsequent government backstop of the banking system. The rush sent Treasury yields tumbling.

1. The largest three-day decline since Oct. 22, 1987

The yield on the 2-year Treasury $US2Y(US2Y.BOND)$ was last trading at 4.03%, down 12.16% on Monday trading, marking the largest three-day decline since Oct. 22, 1987.

That move followed the Oct. 19, 1987 stock market crash — known as “Black Monday” in which the S&P 500 plunged 20% for its worst one-day drop. The move was bigger than the 2-year yield slide of 63 basis points that took place in three days following the 9/11 attacks.

The yield on the 10-year Treasury $US10Y(US10Y.BOND)$ was down 4.87% at 3.543%. 

Prices jumped and yields fell amid the collapse of Silicon Valley Bank that began last Thursday. Regulators had taken over the bank on Friday after mass withdrawals on Thursday led to a bank run. On Sunday, regulators announced they would backstop Silicon Valley Bank’s depositors.

As fears about contagion across the banking sector spiked, many investors looked to government bonds and other traditionally safer assets.

The financial shock also caused investors to rethink how aggressive the Federal Reserve will continue to be with rate hikes, helping to send short-term yields lower.

2. Rebound before Feb CPI Data and wholesale inflation data

U.S. 2-year Treasury yield $US2Y(US2Y.BOND)$ Investors also bracing a key inflation data due this week. February’s consumer price inflation report, including the latest reading of the core inflation rate, is expected Tuesday, followed by wholesale inflation data on Wednesday.

That comes after Federal Reserve Chairman Jerome Powell indicated last week that the central bank’s upcoming interest rate decision would be “data-dependent.”

The central bank is meeting next week and was largely expected to raise rates for a ninth time since March of last year.

Citigroup economists think the Fed will follow through with a 25 basis-point increase next week rather than hold off in response to the banking tumult.

As of post The 2-year U.S. bond yield rose more than 25 basis points, breaking through 4.2% before stock market trades; The 10-year U.S. bond and German bond yields also turned slightly higher.

The focus remains on risks to the banking sector and their implications for the ECB's decision this week.