Markets Hear Peak Rates at Bankquake Roar

SINGAPORE, March 13 (Reuters) – Investors have significantly lowered expectations for a global monetary tightening and dropped forecasts of a bigger Fed rate hike next week, believing the biggest US bank crash since the 2008 financial crisis will make officials think twice.

After a dramatic weekend, U.S. regulators announced that Silicon Valley Bank customers will have access to all their deposits starting Monday, and have created a new mechanism to give banks access to emergency funding.

Expecting the Fed to be reluctant to raise interest rates next week amid nervousness in the air, bond markets quickly revised their interest rate forecasts.

“Tomorrow we will get important data from the US Consumer Price Index (CPI) and if the market turmoil doesn’t last and leads to tighter financial conditions, the Fed will raise 25bps,” said Mark Dowding of BlueBay Asset Management. “If the rate hike starts to bite you need to be more careful.”

In Europe, traders lowered their forecasts that the European Central Bank will raise interest rates by 50 bp. on Thursday, as he informed earlier, and now consider a 25 bp hike. more likely than 50 bp in May.

The markets also eased expectations for monetary policy tightening in the UK, basing the estimates on a 75% chance of a 25 bp rate hike. at the Bank of England meeting next week.

All of this helped extend the rally in short-term bonds, with the two-year UST posting its biggest three-day gain since 1987 on Monday.

Banks also revised their forecasts – analysts at investment bank Goldman Sachs reported on Sunday that they no longer expect the US Federal Reserve to raise interest rates at its March 21-22 meeting.

“I think people are linking Silicon Valley Bank’s troubles to the interest rate hikes that have already happened,” said ING’s Rob Carnell.

“If they were triggered by an interest rate hike, the Fed will take that into account in the future,” Carnell added. – The Fed will not want another 50 bp hike. and see some other financial institution get hit.”

END OF WASTE

Movements in the markets on Monday dragged down the forecasts of the final level of interest rates.

US interest rates are expected to peak at around 4.9% in June, down from an estimate of 5.7% on Wednesday.

The markets continued with a 60% chance of a 50 bp cut in interest rates. until December. That’s a huge drop from last week’s forecast, which projected interest rates to end the year at around 5.5%.

Traders also lowered their forecast for the ECB rate peak to around 3.5% by November, down from last week’s expectations of 4.1%.

“On Thursday, Lagarde will pay much more attention to the risks to prospects than if SVB had not happened,” said Piet Christiansen of Danske Bank.

“So I think the risk is definitely greater now than it used to be,” Christiansen added, although he maintained his forecast for the ECB’s peak interest rate at 4%.

The scale of the change raised concerns among analysts, who noted that the change in forecasts reflects low liquidity in the markets and could rebound quickly, especially if US inflation figures turn out to be strong on Tuesday.

Long-term bond yields fell much less than their short-term counterparts because inflation poses more risk if rates rise slowly or stagnate.

“For that matter, depositor support reinforces the view that the Fed can continue to tighten monetary policy,” said ANZ Bank’s Jack Chambers.

The Fed’s new bank funding program, designed to address some of Silicon Valley Bank’s apparent losses with its bond portfolio, is expected to contribute to the continued stability of banks and the government bond market.

Banks will now be able to borrow from the Fed for Treasury bonds at face value rather than market value, greatly reducing the need for banks to liquidate bonds in the event of unexpected deposit withdrawals.

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(Tom Westbrook and Yoruk Bahçeli, Dara Ranasinghe and Amanda Cooper)