Another “Fed Put” Ahead of the Second Straight Quarter-Point Rate Hike 

The Federal Reserve lifted rates by 0.25% amid banking turmoil and signalled at least one more hike this year. Fed Chair Jerome Powell also said rate cuts were currently not in the central bank's “baseline expectation.” Yet, investors in the bond markets think differently. The collapse of several banks has made it more difficult for the Fed to fight inflation. To some extent, the quantitative easing is back as evidenced by the size of its balance sheet as of March 22: $8,733 billion. That’s a jump of +$391.5 billion over the last two weeks or, seen from another angle, 63% of the quantitative tightening undone since mid-April! 

Fed officials had acknowledged that the “recent developments are likely to result in tighter credit conditions for households and businesses and to weigh on economic activity, hiring and inflation. The extent of these effects is uncertain.”

In this more complex environment, the yield on the benchmark 10-Year U.S. Treasury Note fell 6 basis points from 3.44% to 3.38% while that on the 2-year T-note declined by 8 basis points to 3.77%. In Europe, the yield on the German 10-year Bund rose 2 basis points week-over-week, from 2.11% to 2.13%, while the French OAT yield with the same maturity slipped 4 basis points from 2.69% to 2.65%.

Far from this relative stability, the cost of insuring against the likelihood of default by European banks rose sharply, as concerns about the outlook for the sector continued to grip markets, almost a week after the collapse of Credit Suisse. European banks' Additional Tier 1 debt (AT1 also known as CoCos) came under fresh selling pressure, especially Deutsche Bank and UBS CoCos.

Despite turbulence in the banking sector, investment grade corporate bond prices were up +1.77% in Europe (IBOXX € Liquid Corporates index) and up +0.97% in the U.S. (IBOXX Ishares $ Investment Grade Corporate Bond Index).

High-yield bonds gained +0.31% in Europe (IBOXX € Liquid High Yield Index) and +0.17% in the U.S. (Markit iBoxx USD Liquid High Yield Capped Index).

Emerging debt in local currencies chalked up a 1.70% gain while the U.S. dollar weakened against major currencies.