Bond Report: 2-year Treasury yield jumps back above 4% after report about First Republic Bank

United States

The policy-sensitive 2-year Treasury yield spiked, along with the rate on 6-month T- bills, after a report that several big banks are talking about a potential funding deal with First Republic Bank.

What’s happening
  • The yield on the 2-year Treasury TMUBMUSD02Y, 4.115% spiked to 4.061% from 3.973% on Wednesday.
  • The yield on the 10-year Treasury TMUBMUSD10Y, 3.519% dropped to 3.434% from 3.492% as of Wednesday.
  • The yield on the 30-year Treasury TMUBMUSD30Y, 3.665% slipped to 3.624% from 3.687% late Wednesday.
What’s driving markets

On Thursday, The Wall Street Journal reported that JPMorgan Chase, Morgan Stanley and other big banks were talking about a way to shore up First Republic Bank FRC, -18.93%, including a potential capital infusion. The report gave U.S. stocks a lift and sent rates on 6-month, 1-year, 2-year and 3-year rates soaring.

The report on First Republic Bank followed the Swiss central bank’s efforts to support beleaguered bank Credit Suisse CH:CSGN.

Earlier on Thursday, the European Central Bank followed through with its plan to raise interest rates by a half-percentage point, given inflation that’s projected to remain high. As with the Federal Reserve, investors fear the ECB’s ability to tackle inflation by lifting rates had been compromised by fragility in the banking sector. But the ECB’s decision to plow through with a half-point hike anyway was seen as offering a potential model for the Fed, according to analysts.

Uncertainty about the Fed’s most likely policy trajectory has caused sharp moves up and down in bond yields in the past week or so. Markets are pricing in a 79% probability that the Fed will raise interest rates by another 25 basis points — to a range of 4.75% to 5% — next Wednesday, according to the CME FedWatch tool. The central bank is still mostly expected to cut its policy rate by the end of the year, according to fed funds futures.

U.S. economic updates released on Thursday showed jobless claims tumbled to 192,000 last week and returned close to historic lows, suggesting that layoffs in the U.S. remain quite low. Meanwhile, housing starts rose by 9.8% in February to 1.45 million and the Philadelphia Fed manufacturing gauge remained deep in contraction territory this month.