Traders are casting aside wagers on a supersized Federal Reserve interest-rate hike in March amid concern that the fallout of Russia’s invasion of Ukraine will weigh on the growth outlook.
Swaps linked to the Fed’s March 16 meeting priced in just 24.5 basis points of tightening on Tuesday. That suggests an unusually large half-point hike—which was all but fully priced last month amid concern over accelerating inflation—is now off the table. Bonds rallied across the curve, led by short-dated tenors.
The repricing of the Fed outlook accompanied a wave of demand for the safety of Treasuries as Russia’s invasion of Ukraine entered a new and potentially more deadly phase. Russia’s armed forces will continue their “military operation” in Ukraine until they meet their goals, Interfax quoted Defense Minister Sergei Shoigu as saying.
“There is so much uncertainty on the geopolitical side at the moment,” said Sandrine Perret, economist and fixed income strategist at Vontobel Asset Management. “For the Fed, expectations remain that they will proceed with a rate increase in March, but the risk of having a very large increase has been repriced.”
The yield on two-year government notes fell as much as 17 basis points to 1.27%. The yield on 10-year bonds tumbled as much as 11 basis points to 1.71%, the lowest since Jan. 24. The benchmark rate was above 2% as recently as Friday.
Elsewhere, German 10-year yields slid as much 17 basis points to minus 0.03%, as rates traders bet the European Central Bank will put off raising interest rates until next year. As recently as the middle of last month, they were wagering on two quarter-point increases in September and December, bringing the deposit rate to zero for the first time since 2014.
Traders also delayed tightening wagers for the Bank of England by a couple of months, expecting a one-percentage-point increase by November. U.K. benchmark 10-year yields tumbled 19 basis points to 1.22%.
—With assistance from Libby Cherry.
This article was provided by Bloomberg News.