(Bloomberg) -- Government bonds surged and stocks slid as signs of distress at a California lender spurred broader worries over the US banking sector's debt holdings.
Shorter-dated Treasury yields plummeted for a second day and traders shifted expectations for how big the next hike from the Federal Reserve might be, now favoring a quarter-point move at the March meeting instead of a half.
A key report on US jobs offered a mixed picture on employment and wages, opening the way for yields to drop in the wake of concern about Silicon Valley Bank and the outlook for other US lenders. That moved took a breather during the US morning amid news that premarket trading in SVB Financial Group shares was being halted, pending news.
US two-year Treasury yields dived as traders bet any turmoil at banks could reduce the ability of the Fed to keep hiking interest rates. The Stoxx Europe 600 Index slumped, led by banking shares, with the cost of protecting against corporate defaults jumping.
Markets are jittery on the potential fallout from Silicon Valley Bank — a small technology-focused lender — which has suffered significant losses on a portfolio including US Treasuries. Investors are now turning their attention to risks that may lurk in other financial institutions — and questioning the degree to which the Fed's rate hikes have precipitated that pain.
"Broader banking concerns may put question marks behind the pace the Fed is able to raise interest rates," said Christoph Rieger, head of fixed-rate strategy at Commerzbank AG.
Traders have pared bets on the scope for further Fed policy tightening, which has eroded the value of holding Treasuries. The odds of a half-point rate increase this month went below 50%.
US payrolls in February rose by more than expected while a broad measure of monthly wage growth slowed, offering a mixed picture as the Federal Reserve decides whether to step up the pace of interest-rate hikes. The unemployment rate ticked up to 3.6% as the labor force grew, and monthly wages rose at the slowest pace in a year. Nonfarm payrolls increased 311,000 after a 504,000 advance in January.
"The market is clearly reading that the labor report is solid but not strong enough for the Fed to re-accelerate the hiking cycle," said Roberto Cobo Garcia, BBVA's head of G10 FX strategy. "It would probably take very significant surprises in the CPI data next week for the Fed to change course again. We were surprised about the overreaction of markets after Powell's speech and the move today seem to confirm that investors got too excited."
--With assistance from James Hirai, Tasos Vossos, Ksenia Galouchko, Julien Ponthus, Giulia Morpurgo, John Viljoen and Sydney Maki.
(Updates throughout.)
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