(Bloomberg) -- Treasuries were resurgent Tuesday as investors sought out safer assets amid ongoing worry about US regional banks and as economic data pointed to a softening labor market.
Yields on Treasury notes dived, with maturities from two- to three-year sectors leading the way, dropping about 19 basis points or more on the day. The moves, helped also by a slide in oil prices, reversed shifts from the previous day when Treasury rates took a notable leg up.
The activity came as the KBW Bank Index slumped. PacWest Bancorp and Western Alliance (NYSE:WAL) Bancorp were at the forefront of the selloff, with trading shares on the former being halted amid the plunge. Meanwhile, vacancies at US employers fell in March by more than forecast and layoffs jumped, indicating softening demand for workers.
“Markets are sniffing out credit tightening,” said Jack McIntyre, a portfolio manager at Brandywine Global Investment Management. “The credit tightening, whatever form it takes, will hit at the same time as the lagged effect of monetary policy tightening.” He also underscored the importance of the jobs opening numbers for helping to shape the Fed’s policy.
The two-year yield dropped as much as 21 basis points to 3.93%, while the 10-year benchmark was down 14 basis points to 3.43% at one stage.
At the very short-end of the rates market, swaps continue to price a quarter-point Federal Reserve hike as a highly likely for Wednesday’s policy decision, although trader certainty has waned slightly. The prospects for an additional hike in June have now been wiped out, according to market pricing. And bets have increased on how much subsequent easing might need to be done in the back end of 2023 and into 2024, spurred on by recession fears.
“The Fed should not be hiking anymore, but they probably will and that’s a mistake,” said Eddy Vataru, a fixed-income portfolio manager at Osterweis Capital Management.
In Treasury bills, meanwhile, the picture was muddied somewhat by a repricing of securities in the wake of the government’s latest predictions about the debt ceiling. Yields on Treasury bills for early June soared in New York trading Tuesday in the wake of a warning from Treasury Secretary Janet Yellen that the US government could run into debt-ceiling limitations as soon as the start of next month.