Investors bet on no more big US rate hikes in wake of SVB collapse
Investors are betting on no major US rate hikes after the collapse of Silicon Valley Bank
Investors are betting that the prospect of sharper rate hikes in the US has faded after the crisis sparked by the collapse of Silicon Valley Bank.
The British pound was up more than a penny against the dollar yesterday as traders confirmed their expectation that the Federal Reserve will announce another large increase next week.
SVB’s demise was attributed to the fall in value of its US bond holdings caused by aggressive interest rate hikes.
Rate Cut: The British pound was up more than a cent against the dollar yesterday as traders revised their expectations that the Federal Reserve will announce another big hike next week
Now markets are betting that the turmoil caused by the collapse will give rate-makers pause before making further hikes to try and contain inflation.
That will boost many US stocks, even if bank stocks fall.
“The bank run was accelerated by the Fed’s overly aggressive policies,” said Jay Hatfield, founder and CEO of Infrastructure Capital Management.
“The bull case is that this will finally give them some sense [the Fed] and they will stop raising rates.”
Traders now see a 50 percent chance that the Fed will not raise rates at all next week.
That compares to last week, when a quarter-point hike was fully priced in, with a 70 percent chance of a half-point increase, following recent aggressive remarks from Fed Chairman Jerome Powell.
Yields on two-year U.S. Treasury bonds — which move inversely to prices — fell sharply yesterday, heading for their biggest one-day fall since 1987.
UK financial markets have also scaled back their bets on a Bank of England rate hike in March, with a 60 per cent chance of a quarter point rate hike now this month, down from around 90 per cent last week.
Yields on ten-year UK bonds known as gilts fell the most since 2009, barring the recovery of the gilt market after the chaos caused by the mini-Budget last autumn.
Eurozone bond yields also fell as markets also factored in a smaller rate hike by the European Central Bank.
Jane Foley, senior FX strategist at Rabobank, said reversing further hikes could create a “credibility problem” for the Fed in its fight against inflation.