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(Bloomberg) — The extraordinary global efforts over the weekend to help boost confidence in financial markets received a mixed response Monday, at least going by the reaction in Treasuries.
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Two-year Treasury yields erased a gain of as much as 18 basis points to trade little changed around 3.85% at lunchtime in Asia. That’s a far cry from the yields of more than 5% seen earlier in the month, before a series of US bank failures raised fears of global financial instability.
Regulators worldwide rushed to shore up market confidence over the weekend, with the Swiss government brokering a rescue deal of Credit Suisse Group AG and six central banks unveiling plans to boost dollar liquidity. The moves Monday suggest traders are far from being convinced the rescue measures are sufficient to restore global investor confidence, not least because of the impact in the credit market.
What’s damping risk sentiment are concerns over global banks’ so-called additional tier 1 bonds, after a Swiss regulator said $17 billion of such notes from Credit Suisse will be wiped out. Some Asian lenders’ AT1 bonds fell by a record Monday morning. On top of this, the Federal Reserve’s looming rate decision this week is adding even more uncertainty to the market.
“You have a marked re-pricing of a sizeable chunk of banking sector credit” after the write down in AT1s, said Philip McNicholas, a strategist at Robeco in Singapore. “That has started to percolate through to equities and triggered a broader risk off tone and a flight to safety.”
US overnight indexed swaps now see a 70% chance of a quarter-percentage point hike at this week’s Fed meeting, up from the 50% odds penciled in during the middle of last week.
“A widespread perception of ongoing, significant banking risks is likely to give the Fed pause in its plan to raise rates,” said Jason Schenker, president of Prestige Economics.
Markets are likely to remain nervous even after UBS agreed to buy Credit Suisse, said Andrew Ticehurst, a rates strategist at Nomura Holdings Inc. in Sydney. “That said, we are only at the start of what could be a long and wild week, and markets are likely to remain on edge for some time.”
Two-year US yields swung between 3.71% and 4.53% last week, the widest weekly range for the interest-rate sensitive benchmark since September 2008. The widely-watched MOVE index, which measures implied volatility in Treasuries, topped out at 199 points on Wednesday, the highest since the global financial crisis in 2008.
“Recalibration of risk sentiment should see some big swings as well and I don’t think we’ll settle into a new trading range until perhaps after this week’s FOMC,” said Jessica Ren, a fixed income strategist at Westpac Banking Corp. in Sydney. “Price action will continue to be more sensitive than usual to headlines.”
–With assistance from Ruth Carson and Masaki Kondo.
(Updates with comment.)
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