Treasuries Drop After Credit Suisse Deal, Central Bank Support

(Bloomberg) — Treasuries declined as the rescue of Credit Suisse Group AG and an offer of dollar liquidity damped demand for haven assets after a week-long rout in banking shares.

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Two-year yields jumped as much as 18 basis points to 4.02%, while the 10-year benchmark yield advanced five basis points to 3.48%. The moves came after UBS Group AG agreed to buy Credit Suisse while the Federal Reserve and five other central banks unveiled plans to boost liquidity in dollar swap arrangements.

READ: Fed and Global Central Banks Move to Boost Dollar Funding

Yields will continue to rise, “but recalibration of risk sentiment should see some big swings as well and I don’t think we’ll settle into a new trading range until perhaps after this week’s FOMC,” said Jessica Ren, a fixed income strategist at Westpac Banking Corp. in Sydney. “Price action will continue to be more sensitive than usual to headlines.”

Traders are trying to determine how the recent volatility in global markets will affect the Fed rate decision on March 22. Policy makers have to rein in price pressures without exacerbating the financial stability worries fueled by Credit Suisse’s troubles and the collapse of three US lenders.

US overnight indexed swaps see a 70% chance of a quarter-percentage point hike at this week’s Fed meeting, up from the 50% odds penciled in during the middle of last week.

Markets are likely to remain nervous even after UBS agreed to buy Credit Suisse, said Andrew Ticehurst, a rates strategist at Nomura Holdings Inc. in Sydney. “That said, we are only at the start of what could be a long and wild week, and markets are likely to remain on edge for some time.”

Two-year US yields swung between 3.71% and 4.53% last week, the widest weekly range since September 2008. The widely-watched MOVE index, which measures implied volatility in Treasuries, topped out at 199 points on Wednesday, the highest level since the global financial crisis in 2008.

(Updates yield level in second paragraph and adds quote in third paragraph)