Euro Area, U.S. Bond Yields Tumble As SVB Collapse Scares Investors

Government bond yields on both sides of the Atlantic fell on Monday as investors rushed into safe-haven assets while assessing the possible fallout from Silicon Valley Bank's (SVB) collapse amid bets on less aggressive tightening from the U.S. Federal Reserve.

U.S. authorities launched emergency measures on Sunday to shore up confidence in the banking system after the failure of SVB threatened to trigger a broader financial crisis.

Bank shares in Europe and Asia plunged on Monday as the collapse of SVB continued to batter markets, while large U.S. banks failed to hold onto a brief pre-market rally after authorities moved to stem the contagion.

Goldman Sachs analysts on Sunday said they no longer expect the U.S. central bank to deliver a rate hike at its March 22 meeting and saw considerable uncertainty about the path beyond March in light of the recent events in the banking sector.

The U.S. 2-year Treasury yield was down 34 basis points (bps) at 4.25%, its lowest level since February 3.

Germany's 2-year yield dropped 40 bps to 2.67% after hitting its lowest since February 9. It was set for its biggest daily drop since January 1995.

Short-dated yields are most sensitive to changes in the interest rate outlook.

"The immediate conclusion is that the bar for the Fed to reaccelerate tightening is significantly higher and the likely end-point of that tightening lower," Gorge Saravelos, global head of foreign exchange at Deutsche Bank, said.

Fed funds futures showed traders scaled back their projections for the Fed's next rate rise, but markets still bet on a less than 50% chance of a 25 bps rate hike next week.

A rush into safe-haven assets included long-dated bonds, with Germany's 10-year yield dropping 26 bps to 2.236%, its lowest since February 6.

Italy's 10-year yield fell 18.5 bps to 4.14%.

But some analysts are more cautious about scaling back expectations for the Fed's decisions on March 22.

"We don't think that the developments will derail the Fed from hiking 50bp next week, as also the labour market remains tight even with a slightly higher unemployment rate and a tad slower wage growth," Rainer Guntermann, rates strategist at Commerzbank said.

Markets also focused on the next European Central Bank policy meeting scheduled for Thursday, after money markets reduced their bets about future rate hikes.

"We think euro rates are headed higher, with at least one more spike before the end of this cycle," Antoine Bouvet, head of rate strategy at ING, said in a research note. "This could put 10Y Bund at 3%."

The forward November 2023 ECB euro short-term rate (ESTR) dropped to 3.6%, implying a terminal rate at 3.95% by year-end, from around 3.9% the day before SVB's collapse.

"On balance, we expect the ECB to say it 'intends' to hike by 50bp in May, giving the 16 March meeting a hawkish tilt," Citi analysts said in a research note.

The ECB is expected to raise rates by 50 bps this week.