Collapse forces rethink on interest rate hikes
INVESTORS are betting that the prospect of more sharp US interest rate hikes has faded after the crisis prompted by Silicon Valley Bank’s collapse.
Sterling rose by more than a cent against the dollar yesterday as traders dialled backed their expectations that the Federal Reserve will announce a further big rise next week.
SVB’s demise was blamed on the plunge in value of its US bond holdings, caused by the aggressive increases in rates.
Now markets are betting that the turmoil caused by the collapse will give rate setters pause before making any further hikes to try to contain inflation.
That will boost many US stocks even as banking shares fall.
‘The bank run was precipitated by the Fed’s overly hawkish policy,’ said Jay Hatfield, founder and chief executive of Infrastructure Capital Management.
‘The bull case is that this will finally knock some sense into them [the Fed] and they will stop raising rates.’
Traders now see a 50pc chance that the Fed will not raise rates at all next week. That compares with last week when a quarter percentage point hike was fully priced in, with a 70pc chance of a half-point increase, following recent hawkish comments from Fed chairman Jerome Powell.
Yields on two-year US Treasury bonds – which move inversely to prices – were down sharply yesterday and heading for their biggest one-day fall since 1987.
UK financial markets also scaled back their bets on a Bank of England rate hike in March, with a 60pc chance of a quarterpoint rate hike now seen this month, down from around 90pc last week. Yields on ten-year UK bonds, known as gilts, saw their biggest fall since 2009, with the exception of the gilt market recovery after the chaos caused by the mini-Budget last autumn.
Eurozone bond yields fell too as markets also pencilled in a smaller rate hike from the European Central Bank.
Jane Foley, senior FX strategist at Rabobank, said that backing away from further hikes could create a ‘credibility issue’ for the Fed as it fights inflation.