In mid-March, as prices for U.S. Treasury bonds swung wildly following the collapse of Silicon Valley Bank, the trading desk at Legal & General Investment Management hit its top limits for both profit and loss several times in a single day.
Investors rely on government bond markets to translate central bank interest rates into a stable benchmark for borrowing costs, from corporate loans to household mortgages. Any instability can tighten credit conditions and raise risks of a sharp economic downturn. The woes in the banking sector, including Credit Suisse’s takeover by rival UBS, have further clouded the rates outlook, leaving government bonds vulnerable to further price swings.Shares in troubled U.S. lender First Republic Bank hitting a new record low this week and a looming showdown over the U.S. debt ceiling suggest volatility will continue.
Bruno Benchimol, Credit Agricole’s head of euro zone government bond trading, said that because markets moved so strongly in March, it had been much harder for dealers to take advantage of the volatility than during previous crises.After March’s surge, April trading volumes in German bonds were below the average for 2022 and early this year, data compiled by MarketAxess for Reuters shows.
Pricing for each upcoming Federal Reserve meeting reflects a distribution of cuts, hikes, and no change, said John Madziyire, head of U.S. Treasuries and TIPS at Vanguard.
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