Euro area bond yields tumble as SVB collapse scares investors

Government bond yields fell on Monday as investors rushed into safe-haven assets while assessing the possible fallout from Silicon Valley Bank's (SVB) collapse amid bets on less aggressive tightening from the U.S. Federal Reserve.

U.S. authorities launched emergency measures on Sunday to shore up confidence in the banking system after the failure of SVB threatened to trigger a broader financial crisis.

The European Central Bank is not planning an emergency meeting of its banking supervisory board on Monday after the collapse of SVB, a senior source told Reuters.

European stocks fell on Monday and were on course for their worst day in almost three months, as the region's banking shares continued to tumble.

Goldman Sachs analysts on Sunday said they no longer expect the U.S. central bank to deliver a rate hike at its March 22 meeting and saw considerable uncertainty about the path beyond March in light of the recent events in the banking sector.

The U.S. 2-year Treasury yield was down 41 basis points (bps) at 4.17%, in its biggest daily fall since 2008, after hitting its lowest level since February 3 at 4.157%.

Germany's 2-year yield dropped 40 bps to 2.68% after touching its lowest since February 9 of 2.584%. It was set for its biggest daily drop since January 1995.

Short-dated yields are most sensitive to changes in the policy rates outlook.

"The immediate conclusion is that the bar for the Fed to reaccelerate tightening is significantly higher and the likely end-point of that tightening lower," George Saravelos, global head of foreign exchange at Deutsche Bank, said.

Fed funds futures showed traders scaled back their projections for the Fed's next rate rise, but markets still bet on a less than 50% chance of a 25 bps rate hike next week.

The June 2023 Fed Funds future contract jumped to 95.15 bps -- implying a terminal rate at 4.85% by this summer -- from 94.5 bps last Thursday, with a rate of 5.5%.

A rush into safe-haven assets included long-dated bonds, with Germany's 10-year yield dropping 25 bps to 2.246%, after hitting 2.2%, its lowest since February 6.

Italy's 10-year yield fell 17.5 bps to 4.15%.

But some analysts are more cautious about scaling back expectations for the Fed's decisions on March 22.

"We don't think that the developments will derail the Fed from hiking 50bp next week, as also the labour market remains tight even with a slightly higher unemployment rate and a tad slower wage growth," Rainer Guntermann, rates strategist at Commerzbank said.

Markets also focused on the next European Central Bank policy meeting scheduled for Thursday.

"We think euro rates are headed higher, with at least one more spike before the end of this cycle," said Antoine Bouvet, head of rate strategy at ING. "This could put 10Y Bund at 3%."

The November 2023 ECB euro short-term rate (ESTR) forward dropped to 3.65% -- implying an ECB deposit rate at 3.75% by year-end -- from around 3.9% the day before the crash in SVB shares. ESTR forwards currently imply an 80% chance of a 50 bps rate hike next week.

"On balance, we expect the ECB to say it 'intends' to hike by 50 bp in May, giving the 16 March meeting a hawkish tilt," Citi analysts said in a research note.