Bond Report: 2-year Treasury yield has biggest three-week decline in 35 years as traders assess latest signs of bank stress

Two- and 10-year Treasury yields fell on Friday, posting weekly declines, as investors focused on fresh signs of stress in the financial sector.

Meanwhile, one policy maker, St. Louis Fed President James Bullard, said lower yields may offset some of the negative fallout from the banking sector.

What happened

The yield on the 2-year Treasury

fell 3.1 basis points  to 3.777% from 3.808% on Thursday. For the week, it was down 6.9 basis points. It has fallen 108.2 basis points over the past three weeks, its biggest decline for such a length of time since the period that ended Nov. 6, 1987, according to 3 p.m. data from Dow Jones Market Data.

The yield on the 10-year Treasury

declined 2.7 basis points to 3.379% from 3.406% as of Thursday afternoon. The rate fell 1.6 basis points this week. It has dropped 58.3 basis points over the last three weeks, the biggest three-week plunge since the period that ended March 6, 2020.

The yield on the 30-year Treasury

was 3.642%, down 4 basis points from 3.682% late Thursday. It rose 4.2 basis points this week, the largest weekly gain since the period that ended Feb. 24.

What drove markets

Deutsche Bank shares

dropped 8.5% in Frankfurt trade, putting the health of another systemically important bank in the spotlight. Deutsche Bank’s contingent convertible bonds, or AT1 securities, have dropped sharply in value since Switzerland’s government wiped out similar debt at Credit Suisse as part of the deal for the Swiss bank to be taken over by UBS

Other bank regulators have pledged to not follow Switzerland’s precedent, though investors aren’t reassured. An Invesco fund that invests in AT1 bonds

has dropped 18% this month.

Separately, Treasury Secretary Janet Yellen convened a meeting of the Financial Stability Oversight Council on Friday after Moody’s warned of the risk that the U.S. banking “turmoil” can’t be contained. Meanwhile, the bond market sees a decent chance that the Fed will need to cut rates by a full percentage point by year-end.

In Friday’s U.S. data releases, durable-goods orders fell 1% in February due to less demand for new cars and passenger planes, and S&P Global surveys showed the economy accelerated in March but so did inflation.

See: Bond market ‘screams’ rate cuts as yield curve points to real-time slowdown in U.S. economy

What analysts are saying

“The recent banking stress put markets on high alert and was a most unwelcome development at time when the Fed is trying to engineer a soft landing for the U.S. economy,” said Tom Garretson, senior portfolio strategist at RBC Wealth Management.

“We believe the Fed is indeed done raising rates and that it will need to pivot to two 25 basis point rate cuts later this year as U.S. recession risks materialize, with rates ending 2023 at 4.50 percent, well below the Fed’s current projection.”

See also: These charts suggest the U.S. 10-year Treasury yield’s uptrend has ended

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