Historical week in bonds in charts
(Bloomberg) – Investors in the safest bond markets have been rocked by some of the most dramatic swings on record, and given the risks out there, more turmoil is likely to come.
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Panic trading and low liquidity fueled the outsized moves as concerns about US banks spread around the world last week, driving money into those havens. Interventions by policymakers then helped calm nerves and hit bondholders with more volatility as yields fell.
“Time appears to have accelerated and markets are on steroids to moves that may have played out over several months and are now manifesting in literally a matter of hours,” said Mark Dowding, chief investment officer at BlueBay Asset Management . “It can feel pretty tiring.”
For those tempted to reload positions, the instability isn’t over yet. The Federal Reserve makes its policy decision on Wednesday, with markets vacillating between bets on a half-point hike and the first pause in a year. Add the risk that the turmoil in the banking sector will plunge the global economy into recession and the road ahead looks rocky.
Here are five charts showing the key moves in interest rate markets:
The movement in short-dated US Treasuries was the largest in 40 years as concerns of a new financial crisis prompted a flight to assets considered the safest in the world. Two-year yields slipped 61 basis points, the highest since 1982 when the Fed’s Paul Volcker cut rates as the recession eased.
In Europe, both short and long-dated German bonds broke records. Two-year bonds led the rise, with yields falling the most on data since Germany’s reunification in 1990 on Monday, followed by a 48 basis point fall on Wednesday.
Bond volatility was the widest since the 2008 financial crisis. It was also fueled by ever-changing money market bets on how central banks would respond to the banking turmoil.
In Europe, a measure of expected interest rate volatility climbed to highs seen in 2022 as central banks began embarking on massive rate hikes. While the European Central Bank stuck to a promised 50bp hike on Thursday, it’s still unclear how the Fed and BOE will react in the coming week.
“The bad cocktail of inflation, financial stability risks and communication challenges for central banks is supporting interest rate volatility,” said Tanvir Sandhu, chief global derivative strategist at Bloomberg Intelligence. “Increased uncertainty about the path for interest rates will keep volatility elevated, but these extreme levels are unsustainable.”
Amid the volatility, plans to raise capital have been put on hold. In the US and Europe, it was the first Monday without a deal this year, excluding holidays, following the US lender collapse over the weekend.
New bond sales in Europe slumped over the week, eventually falling well short of market participants’ initial expectations. According to a survey by Bloomberg News, the uncertainty ahead of the Fed’s decision is likely to weigh on activity again in the coming week.
Dash for cash
A rush for cash prompted banks to borrow $164.8 billion from two Fed backstop facilities. This was a sign that funding was tight across the sector following the collapse of Silicon Valley Bank, which was attributed to losses on bond portfolios and depositors withdrawing money.
Data released by the Fed showed that $152.85 billion was borrowed from the discount window — the traditional liquidity backstop for banks — in the week ended March 15, a record high. The previous record was $111 billion, set during the 2008 financial crisis.
–Assisted by Vassilis Karamanis, Paul Cohen and Colin Keatinge.
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