Skip to main content
Market Update

10-year yield sinks on geopolitical uncertainty

Date:
March 7, 2022
  • william smith headshot

    Authors

    Bill Smith

    Associate Director
    Balance Sheet Risk Management

    Financial Institutions | Kennett Square, PA

Summary

Volatility remained elevated and Treasuries rallied last week with the 10-year Treasury yield falling a substantial 23 basis points over the week as market participants fled to safe-haven assets amid the ongoing war in Ukraine.

Interest rates

  • While interest rate volatility has been elevated in a relative context since the turn of the year, the 10-year Treasury yield experienced unusually large swings in trading throughout the week, rising nearly 15 basis points on Wednesday, before falling 12 basis points on Friday to end the week at 1.74%, approximately 23 basis points lower than where it began the week.
    • Although the moves lower in the front-end of the curve were less dramatic than those at the long end of the curve, the uncertainty stemming from the war in Ukraine drove investors to reevaluate the prospects for Fed rate hikes this year and next.
  • Looking at the Fed Funds futures market at Friday’s close, market participants are now pricing in fewer than six rate hikes through February of next year, a stark contrast from the nearly seven hikes expected in that same timeframe only one week ago.
    • Although market participants dialed back expectations for Fed rate hikes last week, a 25 basis point hike in March remains likely with market participants indicating a 94% chance of a hike at the next meeting after Fed Chair Powell expressed support for a move and indicated that despite the war in Ukraine “we will proceed.”
  • The significant rally at the 10-year point of the Treasury curve compressed the already narrow 2s/10s basis to under 25 basis points, the smallest gap since the onset of the pandemic in mid-March 2020.
  • The elevated market volatility sparked elevated trading volume across our balance sheet desk last week, with clients positioning for rate moves depending on their risk objectives.
    • We saw significant activity at the short-end of the curve with clients looking to monetize the steepness of the front-end of the curve and mitigate asset sensitivity with receive-fixed interest rate swaps.
    • We also saw several clients hedge rising rates by locking in the cost of next year’s wholesale funding needs and others mitigating the price sensitivity of newly-issued agency and treasury securities.

    Bank M&A heats up to start March

    • Bank M&A activity continued the strong start to 2022 last week when Toronto-Dominion Bank announced a $13.54 billion deal to purchase First Horizon Corp.
      • The proposed deal is the largest acquisition announcement since Bank of Montreal announced the planned takeover of Bank of the West in December and accounts for over 90% of the total 2022 deal value.
    • The TD-FHN deal was not the only M&A announcement last week, however, as Fulton Financial Corp. announced a stock-and-cash merger with Prudential Bancorp Inc. valued at $142.1 million.
    • Through the first week of March, 28 deals have been announced since the turn of the year totaling $14.4 billion, already more than the total deal value seen in the first quarter of 2021.

    Economic Data

    • As was the case for the two weeks prior, an economic calendar packed with high-profile updates largely underwhelmed as market participants focused their attention on the latest geopolitical developments resulting from the war in Ukraine.
    • Investor sentiment improved somewhat after the February non-farm payroll report indicated that the U.S. economy added a robust 678,000 jobs last month, far exceeding both the consensus estimate and the upwardly-revised 487,000 jobs added in January.
      • The unemployment rate fell more than expected to 3.8%, while average hourly earnings took a breather in February, remaining unchanged from a month earlier.
    • February’s strong payroll report reinforced many analysts’ expectations for a 25 basis point rate hike at this month’s meeting given Fed Chair Powell’s comments from earlier in the week suggesting that the labor market is “extremely tight” and that the Fed’s maximum employment objective is all but met.
    • After a series of regional manufacturing surveys sent conflicting signals about the state of the industry in recent weeks, the national ISM Manufacturing Index fared better than expectations in February improving modestly from the week prior as both new orders and production accelerated after a holiday-season setback from a surging omicron variant.
      • According to the release, price pressures softened somewhat in February, falling moderately below January’s levels but continuing to run hot in a historical context.
    • Finally, jobless claims fell to the lowest level since the start of the year on the back of falling omicron case counts and easing COVID-19 restrictions across the country.
      • Continuing claims remained roughly unchanged from the week prior at 1.48 million claims and marked the lowest four-week average since 1970.

                  The look forward

                  Upcoming economic data releases

                  • Trade Balance – Tuesday
                  • Wholesale Inventories – Tuesday
                  • Consumer Price Index – Thursday
                  • Jobless Claims – Thursday

                                        Upcoming Federal Reserve Speakers

                                        • There are no Federal Reserve speakers this week.

                                                            Rates snapshot

                                                            Market implied policy path (Overnight indexed swap rates)

                                                            Source: Chatham Financial

                                                            About the author

                                                            • Bill Smith

                                                              Associate Director
                                                              Balance Sheet Risk Management

                                                              Financial Institutions | Kennett Square, PA


                                                            Disclaimers

                                                            Chatham Hedging Advisors, LLC (CHA) is a subsidiary of Chatham Financial Corp. and provides hedge advisory, accounting and execution services related to swap transactions in the United States. CHA is registered with the Commodity Futures Trading Commission (CFTC) as a commodity trading advisor and is a member of the National Futures Association (NFA); however, neither the CFTC nor the NFA have passed upon the merits of participating in any advisory services offered by CHA. For further information, please visit chathamfinancial.com/legal-notices.

                                                            Transactions in over-the-counter derivatives (or “swaps”) have significant risks, including, but not limited to, substantial risk of loss. You should consult your own business, legal, tax and accounting advisers with respect to proposed swap transaction and you should refrain from entering into any swap transaction unless you have fully understood the terms and risks of the transaction, including the extent of your potential risk of loss. This material has been prepared by a sales or trading employee or agent of Chatham Hedging Advisors and could be deemed a solicitation for entering into a derivatives transaction. This material is not a research report prepared by Chatham Hedging Advisors. If you are not an experienced user of the derivatives markets, capable of making independent trading decisions, then you should not rely solely on this communication in making trading decisions. All rights reserved.

                                                            22-0058