Investors scrambled to pull down global rate expectations on Monday and abandoned wagers on steep U.S. hikes next week, reckoning the biggest American bank failure since the financial crisis will make policymakers think twice.
Bank stress and the resultant shakeout of loan books mean higher borrowing costs, said Akira Takei, fixed income portfolio manager at Asset Management One in Tokyo, with the resulting pressure in the real economy making further hikes difficult.
A late-Sunday note from Goldman Sachs, in which the banks' analysts said the banking stress meant they no longer forecast the Fed to hike rates next week gave the rates rally an extra leg in the Asia session.At 4.4098% they are also below the bottom end of the Fed funds rate window at 4.5% - a sign markets see rates' peak is near.
"If rates going up caused this, the Fed is going to mindful of that in futures," he said. "It's not going to want to go clattering in with another 50 and see some other financial institution getting hosed."Monday's early moves also sharply pulled forward and pushed down market expectations for where rates peak. From about 5.7% on Wednesday, implied pricing for the peak in U.S. rates was testing 5% on Monday and year-end expectations - above 5.
The size of the shifts drew warnings from analysts who said they could unwind quickly especially if U.S. inflation data is hot next week. Long-dated bonds were also left behind, with inflation being a greater risk if hikes were to slow or stop.
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