After much volatility observed in the wake of March banking turmoil, movements in Treasury securities and similar US bonds have smoothed over the last week at new lows, painting the dual picture of market expectations for low economic growth alongside greater stability for corporate borrowing. After sliding 103 basis points from the eve of Silicon Valley Bank’s collapse to the Monday after, further volatility in the 2-year Treasury yield has dimmed over the last week, resting since last Friday within a range of 7 basis points after the previous week saw a range of 27 basis points.
In light of this recent stability, it’s important to remember the crucial role that Treasurys play as a trend-setter in the bond market. As Sam Goldfarb writes for The Wall Street Journal, “When Treasury yields are falling or surging, it makes it hard to price other assets such as corporate bonds. As a result, corporate borrowing can come to a standstill, halting the regular flow of capital that keeps the economy moving.” Indeed, weekly issuance in investment-grade corporate bonds, corporate bonds with little to moderate credit risk, rose from $521 million in the week after SVB’s collapse to a little under $15 billion over the last week. Meanwhile, flatlining Treasury yields and skyrocketing corporate borrowings should demonstrate growing strength in the banking sector and subsiding fears of a widespread panic after the collapse of SVB. Other implications stemming from recent Treasury yield movement, however, compel me to argue that this recent banking stability won’t necessarily translate into greater forecasts of economic growth.
U.S. 2-Year Treasury Yield since April 2022
Source: U.S. Department of Treasury
The 2-year Treasury is ultimately settling at around 4 percent, over 100 basis points down from before SVB’s collapse and the lowest yield since September of 2022, with the Fed’s hiking of the federal funds rate by 2.31 percent since September likely being the largest influence on the yield’s increases leading up to the collapse. Even as markets forecast another rate increase at the April 27 FOMC meeting, however, a declining short-term Treasury yield likely suggests tightening lending standards and predictions of sluggish economic growth over the coming months. Although this may run counter to the Treasury yield’s previous correlation with the federal funds rate, new lows in the 2-year may serve to be a reassuring sign to the Fed that increasing rates is causing the demand destruction necessary to reach its 2 percent inflation target. Not only that, but a relatively stable Treasury yield as of late, as hinted earlier, suggests that banking turmoil may be averted and that a “soft landing” from the Fed is not only possible, but expected.
Although forecasts of sluggish economic growth may be interpreted as the downside to recent movements in the 2-year Treasury yield, for the sake of reining in inflation, recent movements may indeed be considered a win-win by the Fed. The task, now, is for yields to remain relatively constant and to continue guiding liquidity across the banking sector, keeping hopes for a soft-landing alive.