Despite significant steps by the U.S. government over the weekend to restore confidence in the banking system, investors are fleeing to the safety of U.S. Treasury bonds to start the week. The sudden failures of Silicon Valley Bank and Signature Bank — the second- and third-largest U.S. bank failures on record — required just as sudden a response by the U.S. government to stem the tide of depositors exiting the banking system.1 The two most significant steps were insuring bank deposits above the $250,000 limit and setting up a new Federal Reserve (Fed) lending facility that effectively eliminates the duration risk of fixed income assets being used as collateral.
Treasury bond yields are falling sharply, led by the front end of the yield curve as investors reassess the path of Fed tightening. The 2-year Treasury note yield just registered its steepest three-day decline since October 1987.2 The disinflationary forces of stress in the banking system and tightening credit conditions could likely do more to get inflation back toward the Fed’s 2% target than additional rate hikes.
1Source: The New York Times- Silicon Valley Bank Fails After Run on Deposits; 3/10/23
2Source: CNBC- U.S. 2 Year Treasury; as of 3/13/23
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