Treasury yields see biggest three-day skid since wake of Black Monday in 1987

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Investors flocked in droves to the safety of Treasurys on Monday in a manner not seen since the days that followed the 1987 stock-market crash, after the sudden closure of two banks and banking regulators stepping in over the weekend to fully protect their deposits.

The policy-sensitive 2-year Treasury yield
TMUBMUSD02Y,
4.134%
briefly fell below 4% earlier Monday and headed for its biggest three-day decline since Oct. 22, 1987 — an infamous period that was kicked off by “Black Monday,” when Dow industrials dropped 22.6% on Oct. 19 of that year.

On Monday, the 2-year rate was also poised for its biggest one-day drop since the 2007-2008 global financial crisis, while the 10-year yield BX:TMUBMUSD10Y headed for its largest three-day decline since that era.

Traders now see a decent chance that the Federal Reserve will halt rate increases this month, helping to give U.S. stocks a lift on Monday after a sharply lower open. The three major stock indexes
DJIA,
+0.49%

SPX,
+0.70%

COMP,
+1.37%
were mostly higher in afternoon trade, as fed funds futures traders priced in a 32.8% chance of a pause on March 22 — a view also shared by at least one major Wall Street firm, Goldman Sachs Group Inc. GS

Read: SVB’s rescue means the Fed won’t hike rates in March, says Goldman Sachs

“The market is assuming that the long-awaited pivot from the Fed is now upon us,” said Keith Buchanan, a senior portfolio manager at GLOBALT Investments in Atlanta. The bond-market’s actions on Monday reflect “a flight to quality since there are very few quality assets left like Treasurys. So whenever there’s a crisis, people will flood into these very, very safe assets and naturally push down rates.”

Initially, financial markets began the trading day with a crisis-like tone in the air after regulators took decisive action over the weekend to protect all depositors of California’s Silicon Valley Bank and Signature Bank of New York, citing a “systemic risk exception” for two non-systemically important banks.

According to Buchanan, what had markets so unnerved early on was that regulators’ actions went “a long way” toward protecting depositors, but not equity shareholders or bondholders.

Systemic risk exception refers to the part of the Federal Deposit Insurance Corporation Improvement Act of 1991, which allows the Treasury Secretary, in consultation with the president, to take action to protect uninsured depositors in the presence of systemic risk.

After Black Monday, the stock market also was retooled. Marketwide circuit breakers were put in place following the crash to force 15-minute trading halts after declines of 7% and 13% and then close the market for the day after a drop of 20%.

Archives: It’s the 35th anniversary of the 1987 stock-market crash: What investors can learn from ‘Black Monday’

Monday’s initial flight from risk still left the S&P 500’s financial sector down 3.4% in afternoon trading, according to FactSet data.

Meanwhile, the policy-sensitive 2-year rate, which ended the New York session at 5.011% on Wednesday after two days of hawkish testimony by Fed Chairman Jerome Powell, briefly fell to as low as 3.976% earlier on Monday — or more than a full percentage point during the past three trading sessions — before paring its drop to around 4.1%.

“The move into the Treasury market reflects concern that the administration’s attempts to calm investor anxiety won’t work, and that the ensuing panic and fear could quickly lead to the dreaded ‘contagion’ that envelops the market’s psyche,” Quincy Krosby, chief global strategist for LPL Financial, said before major stock indexes bounced back on Monday. “Restoring liquidity in the banking system is easier than restoring confidence, and today it is clearly about the latter.”

In 1987, the stock market unraveled after investor confidence was undermined by a number of different events, including a larger-than-expected trade deficit, falling dollar, and rolling selloffs that coincided with a “triple witching” or situation when monthly expirations of options and futures contracts occurs on the same day. Analysts at the Chicago Fed describe the 1987 stock market crash as the first contemporary global financial crisis.

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