Treasury Yields Plunge on Fresh Bank Fears, US Economic Data

(Bloomberg) — US Treasuries rallied Wednesday as data showed hiring slowed at a faster-than-expected pace and the shares of a New York bank tumbled after it reported a surprise loss, raising concerns about the health of regional lenders.

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The move sent two- to five-year Treasury yields tumbling more than 10 basis points as traders priced in a higher likelihood of Federal Reserve interest-rate cuts beginning as soon as March. Fed policy makers are set to conclude a two-day meeting Wednesday afternoon with no change in policy expected. The US 10-year yield fell back below 4%.

New York Community Bancorp, the regional lender that purchased deposits from Signature Bank last year, fell a record 45% after reporting a fourth-quarter loss and dividend cut. The KBW Regional Banking Index tumbled as much as 4.8%, the most in a day since May. Its slide evoked memories of the banking turmoil that followed the collapse of the Silicon Valley Bank in March.

“Right now, it appears this is an isolated event,” said Tom di Galoma, co-head of global rates trading for BTIG in New York. “The bond market is looking for an event that will trigger the Fed to ease policy.”

Government bonds rallied globally, with bigger yield declines in several euro-zone markets after slower-than-expected French inflation readings helped the outlook for European Central Bank interest-rate cuts.

In the US, traders increased their bets on Fed rate cuts in 2024, with the potential for the first one in March given about two-thirds odds versus one-third on Tuesday. Almost 150 basis points of rate cuts were priced in for the entirety of 2024, up from around 135 basis points. The dollar fell to a one-week low, and haven buying lifted the yen and Swiss franc.

The two-year Treasury note’s yield declined as much as 15 basis points to 4.18%, the lowest level since Jan. 16.

Earlier, bonds drew support from US economic data including January ADP employment and fourth-quarter employment costs — both of which increased less than estimated — as well as from the Treasury’s announcement of auction sizes for the February-to-April quarter. Treasury said the increases it made were likely to be the last ones for at least several quarters.

The data are “aligning nicely, with front end markets under-pricing the probability of a cut in March,” said Ed Al-Hussainy, global rates strategist at Columbia Threadneedle.

Al-Hussainy downplayed the impact from the New York Community Bancorp, saying it has “no systemic” value. “I guess it’s not a happy day for their shareholders, but otherwise it’s irrelevant,” he said.

–With assistance from Edward Bolingbroke and Alexandra Harris.

(Adds other global markets in fifth and sixth paragraphs.)

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