Bond traders eyeing the deepening rout in US regional bank shares concluded Thursday that the Federal Reserve is likely to reverse this week’s quarter-point interest-rate increase by July in response to tightening credit conditions.

Swap contracts linked to Fed meeting dates collapsed, with the July rate briefly falling to 4.83%, a quarter point below the 5.08% level where the effective fed funds rate is likely to settle as a result of Wednesday’s increase in the target band to 5%-5.25%. Short-term Treasury yields also slumped, the five-year to the lowest level since August. 

The June swap rate at lows around 5% reflected one-in-four odds of a cut as soon as June, while the December rate shed more than 30 basis points, fully pricing in an additional rate cut beyond the two that were expected at Wednesday’s close.

The decline in short-term was the third straight, and it tracks a more than 10% drop this week in the BFW Regional Banking Index driven by solvency concerns based on several failures since March. It accelerated on Wednesday after the Fed statement announcing its rate decision signaled that a pause was possible in June to assess the impact of their actions to date.

The policy-sensitive two-year yield fell as much as 15 basis points to 3.65%, down more than 50 basis points since Monday.

The five-year Treasury note’s yield declined as much as 7 basis points to just under 3.23%, a level last seen on Aug. 30. It peaked this year at 4.37% on March 8.

Longer-dated yields declined less, a sign of concern about Fed caution in the face of elevated inflation. The 30-year bond’s yield reached levels nearly 50 basis points higher than the five-year note’s yield, compared with 17 basis points earlier this week.

“With the Fed on hold and inflation still high, some additional term premium may be warranted in longer-term Treasury securities,” said Roger Hallam, global head of rates at Vanguard Asset Management.

--With assistance from Edward Bolingbroke and Benjamin Purvis.

This article was provided by Bloomberg News.