Largest drop because the crash of ’87

Investors flocked to US Treasuries on Monday following the collapse of Silicon Valley Bank and subsequent government bailing out of the banking system. The rush caused government bond yields to fall.

The return on the 2 years treasury was last traded at 4.06%, down 53 basis points. (1 basis point equals 0.01%. Prices move inversely with yields.)

The yield has fallen 100 basis points, or a full percentage point, since Wednesday, marking the largest three-day decline since October 22, 1987, when the yield fell 117 basis points. This move followed the October 19, 1987 stock market crash known as “Black Monday,” when the S&P 500 plummeted 20%, marking its worst daily loss. The move was larger than the 63 basis point 2-year yield slide that occurred in three days after the September 11 attacks.

The return on the 10 years treasury declined nearly 21 basis points to 3.477%.

With Silicon Valley Bank collapsing, which began last Thursday, prices soared and yields fell. Regulators took over the bank on Friday after mass withdrawals led to a bank run on Thursday. On Sunday, regulators announced they would support Silicon Valley Bank depositors.

As fears of banking sector contagion mounted, many investors turned to government bonds and other traditionally safer assets.

The financial shock also prompted investors to reconsider how aggressively the Federal Reserve will continue to be about rate hikes, which would help push short-term yields lower. The central bank meets next week and was widely expected to hike rates for the ninth time since March last year — but that was before the Silicon Valley bank collapsed last week.

Goldman Sachs no longer believes the Fed will hike rates, citing “recent tensions” in the financial sector. However, according to an estimate by CME Group, marking pricing at the March 21-22 Federal Open Market Committee meeting indicated a solid bias for a 25 basis point gain.,

The 2-year Treasury yield rose to 5.085% last week, its highest level since June 2007 before the sudden drop.

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Two-year US Treasury yield

“If you slam on the brakes, you risk both economic and financial crashes, and we’ve just had a financial crash,” economist Mohammed El-Erian said on CNBC’s “Squawk Box,” referring to the aggressive tightening campaign fed

Investors also braced themselves for a set of key inflation data coming this week. The February CPI report, including the latest reading of core inflation, is expected on Tuesday, followed by wholesale inflation data on Wednesday.

That comes after Federal Reserve Chair Jerome Powell hinted last week that the upcoming central bank interest rate decision would be data dependent. Powell also hinted that interest rates were likely to rise more than expected as the Fed’s fight against inflation continues.

Citigroup economists believe the Fed will go ahead with a 25 basis point hike next week rather than wait and see in response to the banking turmoil.

“This would invite markets and the public to assume that the Fed’s determination to fight inflation only extends to the point of creating bumps in financial markets or the real economy,” said Citi economist Andrew Hollenhorst in one Customer Notice.