A flight to safety in the wake of the failure to two US banks led to an abrupt fall in the yields of short-dated government bonds in both the US and Germany. Our chart of the week shows the precipitous fall of yields in 2-year US Treasury notes and 2-year German government bonds.
US 2-year yields fell by 61 basis points on 13 March, marking the biggest one-day fall since 1982. German 2-year Bund yields fell by 41bp. Again, this was the largest single-day drop for at least 30 years. Yields of German 10-year Bunds dropped by around 55bp.
In the view of our multi-asset team, the extent of the falls in German yields is unwarranted, as are the declines in ECB policy rate forecasts through end-2023. European economic fundamentals have not changed: eurozone inflation remains sticky, labour markets are rigid, and recent wage settlements will likely contribute to inflationary pressures. There is also significant bond issuance to come in 2023. For these reasons, our multi-asset team took advantage of the fall in German bond yields on Monday to initiate an underweight position relative to their portfolios’ benchmarks.
At this time, the consensus view is that the demise of Silicon Valley Bank and Signature Bank will not have major implications for the European banking sector. Compared to US banks, European large-cap banks rely more on sticky retail deposits gathered through cross-selling across their networks. They are more diversified in terms of product mix and geographic mix than mid-sized US banks such as SVB and are more heavily regulated. Almost all European banks are considered as globally or domestically systematically important banks. Also, liquidity ratios are high at around 150% in Europe.