Mar 18, 2023
Historic Week in Bonds Told in Charts
(Bloomberg) -- Investors across the safest bond markets have been rocked by some of the most dramatic swings on record, and there’s likely more turbulence in store given the risks out there.
Panicked trading and thin liquidity led to the outsized moves, as concern over US banks spread around the world in the past week, driving money into these havens. Policymaker interventions then helped ease nerves, battering bondholders with more volatility as yields went into reverse.
“Time feels like it has been sped up and markets are on steroids in terms of moves, which may have played out over several months, now being manifest in literally a few hours,” said Mark Dowding, chief investment officer at BlueBay Asset Management. “This can feel pretty exhausting.”
For those tempted to reload positions, the instability isn’t over yet. The Federal Reserve makes its policy decision on Wednesday, with markets lurching between bets on a half-point hike and the first pause in a year. Add in the risk the turmoil in the banking sector will tip the global economy into recession, and the path ahead looks rocky.
Here are five charts showing key moves across rates markets:
The move in short maturity US Treasuries was the biggest in 40 years as the worries over a new financial crisis drove a flight to assets seen as the world’s safest. Two-year yields slid 61 basis points, the most since 1982, when the Fed’s Paul Volcker slashed rates as a recession eased.
In Europe, both short- and long-maturity German bonds broke records. Two-year bonds led the surge, with yields falling the most in data going back to Germany’s reunification in 1990 on Monday, and then topping that with a 48 basis-point collapse Wednesday.
The swings across bonds were the biggest since the financial crisis of 2008. They were also driven by constantly changing money market bets on how central banks would respond to the banking turmoil.
In Europe, a gauge of expected interest-rate volatility climbed toward highs recorded in 2022, when central banks started making jumbo hikes. While the European Central Bank stuck to a promised 50 basis-point increase Thursday, the jury is still out on how the Fed and BOE will respond in the coming week.
“The bad cocktail of inflation, financial stability risks and communication challenges for central banks is supporting rates volatility,” said Tanvir Sandhu, chief global derivatives strategist at Bloomberg Intelligence. “Heightened uncertainty on the path of policy rates will keep volatility elevated but these extreme levels are unsustainable over time.”
Amid the volatility, plans to raise capital were put on hold. In the US and Europe, following the weekend collapse of US lenders, it was the first Monday without a deal this year, excluding holidays.
Sales of new bonds slumped through the week in Europe, ending up hugely lagging the original expectations of market participants. Uncertainty ahead of the Fed decision is expected to hamper activity again in the coming week, according to a survey by Bloomberg News.
Dash for Cash
A dash for cash led banks to borrow $164.8 billion from two Fed backstop facilities. That was a sign of escalated funding strains across the sector in the aftermath of a Silicon Valley Bank failure driven by losses on bond portfolios and depositors pulling money.
Data published by the Fed showed $152.85 billion in borrowing from the discount window — the traditional liquidity backstop for banks — in the week ended March 15, a record high. The prior record was $111 billion reached during the 2008 financial crisis.
--With assistance from Vassilis Karamanis, Paul Cohen and Colin Keatinge.
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