US bond yields fell on Wednesday as woes at Swiss banking giant Credit Suisse reverberated around financial markets and prompted traders to factor in a full percentage point rate cut from the Federal Reserve by the end of the year. What’s Happening The yield on the 2-year Treasury TMUBMUSD02Y, 3.792% fell nearly 39 basis points to 3.834% from 4.221% on Tuesday. The yield on the 10-year Treasury TMUBMUSD10Y, 3.420% fell 20 basis points to 3.432% from 3.633% on Tuesday, and is on track for its biggest one-day drop since Nov. 10. The yield on the 30-year Treasury TMUSD3MUBY , 3.633% fell nearly 12 basis points to 3.642% from 3.760% late Tuesday afternoon. Credit Suisse CS, the largest shareholder at -21.54%, said it would not invest any more funds, Bloomberg reported. Shares in Credit Suisse hit record lows and dragged European banks lower, while a new wave of government-bond buying began as investors sought safety in sovereign paper. Credit Suisse’s woes also sparked a fresh wave of selling in a number of US regional-bank stocks and renewed fears that the banking sector is highly vulnerable to higher interest rates. According to the CME FedWatch tool, traders are no longer bullish on the possibility of at least 100 basis points, or a full percentage point, of a rate cut by the Federal Reserve by the end of the year. They now also see a 47.6% chance of a break by the Fed next Wednesday and a 52.4% chance of a quarter-point hike, which would take the fed-funds rate target to between 4.75% and 5%. In addition to renewed banking anxiety, data released on Wednesday showed that US retail sales slowed for the third time in four months during February. Sales at retailers fell 0.4% last month – matching the estimate of economists polled by The Wall Street Journal. Wholesale prices fell 0.1% in February for the second drop in three months, suggesting stubbornly high inflation is showing signs of easing. PPI was expected to rise 0.3% month-on-month. What analysts are saying “The last week has been fast-paced for policymakers and markets. The focus quickly shifted from the possibility of a 50bp Fed hike to more stress in the US banking system and the possibility of cuts in the coming months,” said Karen Reichgott Fishman and Sid Bhushan of Goldman Sachs. Their analysis suggests that, at least initially, “most markets priced in a dovish Fed shock (and investors at risk) rather than significant monetary stress.”
