The sudden collapse of two large U.S. regional banks, Silicon Valley Bank and Signature Bank, has sent shockwaves through the bond market, forcing a turnaround in the expectations for the Federal Reserve’s monetary policy. The emergency measures by the Fed and the U.S. government to guarantee bank deposits have failed to reassure the markets, causing a steep fall in short-term U.S. Treasury yields since Thursday. The tumble in yields is the steepest since October 1987 and has pulled the dollar down from its three-month highs.
U.S. Treasury Yields Tumble as Bank Collapse Erodes Expectations
The collapse of the two banks is eroding the expectations for the Federal Reserve’s more aggressive monetary policy, which has been priced in by the bond markets. The sudden reversal is causing the yields on U.S. Treasuries to tumble, with two-year yields falling more than a percentage point from the 15-year high of 5.084% reached last week. The 10-year yields have also dipped to 3.418% from over 4% last week.
Greenback Rally Stalled
The sudden fall in U.S. Treasury yields and the eroding expectations for the Federal Reserve’s monetary policy are also stalling the greenback’s rally. The expectation of a more aggressive policy by the Fed had driven the greenback to its 20-year high. However, the collapse of the two banks is now undermining this rally, and the greenback is falling from its three-month highs.
In conclusion, the collapse of the two banks in the U.S. is causing a sudden turnaround in the expectations for the Federal Reserve’s monetary policy, and this is sending shockwaves through the bond markets. The steep fall in short-term U.S. Treasury yields is eroding expectations of a more aggressive policy by the Fed, and this is stalling the greenback’s rally to fresh 20-year highs.
