the biggest drop since the ’87 crash

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Investors poured into US government bonds on Monday after the collapse of Silicon Valley Bank and the subsequent government bailout of the banking system. The rush lowered the Treasury yield.

The result of the 2-year finance changed so far -4.06% compared to yesterday. (1 basis point equals 0.01%. Prices move inversely to yield.)

The yield has fallen 100 basis points, or a full percentage point, since Wednesday, marking the biggest three-day decline since Oct. 22, 1987, when the yield fell 117 basis points. That move followed the stock market crash of October 19, 1987 – known as “Black Monday” in which the S&P 500 fell 20% for its worst one-day drop. The move was larger than the 2-year yield slide of 63 basis points that occurred in three days after the 9/11 attacks.

The result of the 10-Year Treasury changed so far -3.477% compared to yesterday.

Prices jumped and yields fell amid the collapse of Silicon Valley Bank that began last Thursday. Regulators had taken over the bank on Friday after a massive withdrawal on Thursday led to a bank run. On Sunday, regulators announced that they would suspend Silicon Valley Bank investors.

As fears of contagion spread throughout the banking sector, many investors looked to government bonds and other traditionally safer assets.

The financial crisis also caused investors to reconsider how aggressive the Federal Reserve will be with rate hikes, helping to push short-term yields lower. The central bank meets next week and was widely expected to raise rates for the ninth time since last March – but that was before Silicon Valley Bank collapsed last week.

Goldman Sachs now does not believe the Fed will raise rates, citing “recent stress” in the financial sector. However, benchmark prices indicated a strong move toward a 25 basis point increase at the March 21-22 meeting of the Federal Open Market Committee, according to CME Group estimates.

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

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2-year US Treasury yield

“When you hit the brakes you run the risk of both economic and financial crashes, and we just lived through a financial crash,” economist Mohammed El-Erian said on CNBC’s “Squawk Box,” referring to the Fed’s aggressive tightening campaign.

Investors were also bracing themselves for a series of key inflation data to come this week. The February consumer price inflation report is expected to include the latest reading of the headline inflation rate on Tuesday, followed by wholesale inflation data on Wednesday.

That comes after Federal Reserve Chairman Jerome Powell announced last week that the central bank’s interest rate decision would depend on data. Powell also suggested that interest rates are likely to go higher than expected as the Fed’s battle against inflation continues.

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

“Doing so would invite markets and the public to assume that the Fed’s solution to fighting inflation is only up to the point when there is any disruption in financial markets or the real economy,” Citi economist Andrew Hollenhorst said in a client note.

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