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Treasuries jump as investors cut bets on half-point rate rise

US Treasury yields tumbled on Friday as investors sought safety amid a selloff in bank stocks, and a mixed labour market report allayed fears the Federal Reserve would raise rates by half a percentage point at its meeting later this month.

Yields on benchmark 10-year bonds fell 0.18 percentage points to 3.74 per cent, reflecting rising prices, having breached 4 per cent earlier this week. The yield on the two-year benchmark, which is more sensitive to interest rates, fell 0.22 percentage points to 4.69 per cent. Yields fall when the price of debt rises.

Stocks on Wall Street fell for a second day in volatile trading, dragged by broad losses for bank shares following fears that tech-focused Silicon Valley Bank could be a sign of broader woes in the sector. SVB was put into receivership on Friday.

European bank stocks dropped from the open following sharp US falls on Thursday but the sector recovered slightly from its lows as the day wore on and analysts cautioned against reading too much into SVB’s woes.

“The situation says more about ‘SV’ than B,” said the team at CreditSights. ”Our initial take is that the issues at SVB are idiosyncratic, based on its business model and especially its funding profile.”

The S&P 500 was 1.1 per cent lower and the Nasdaq was down 1.4 per cent as investors weighed the banking drama against signals from closely watched data: the monthly US employment report showed the economy added 311,000 new jobs in February, far above market expectations of 210,000. However, wage growth slowed to 0.2 per cent from January, while a separate survey reported a larger than forecast rise in the unemployment rate to 3.6 per cent.

Combined, the data could ease pressure on the Federal Reserve to reaccelerate its efforts to curb inflation with bigger interest rate rises. CME Group’s Fedwatch tool implied investors were pricing in a 50-50 chance of a quarter-point rise after its March 22 meeting, from having reckoned on Thursday that a half-point move was a 68 per cent probability.

“The mixed message from the February jobs report makes the upcoming Fed meeting a close call, but we are sticking with a [quarter-point] hike for now,” said Michael Feroli, analyst at JPMorgan.

The dollar index, which measures the greenback against a basket of six peer currencies, fell 0.9 per cent.

European markets were also lower. The region-wide Stoxx 600 closed down 1.4 per cent, hit by falls in bank stocks such as Deutsche Bank and Société Générale. The Stoxx bank index lost 3.8 per cent. London’s bank-heavy FTSE 100 ended down 1.7 per cent.

In Asia, Hong Kong’s Hang Seng index was down 3 per cent, China’s CSI 300 shed 1.3 per cent, South Korea’s Kospi declined 1 per cent and Japan’s Topix lost 1.9 per cent.

“An earthquake in Silicon Valley led to aftershock on Wall Street and the tremors could still be felt in London on Friday morning,” said Russ Mould, investment director at AJ Bell, a UK investment platform. “Lots of banks hold large portfolios of bonds and rising interest rates make these less valuable — the SVB situation is a reminder that many institutions are sitting on large, unrealised losses on their fixed-income holdings.”

Yields on European sovereign debt fell, with those on 10-year German Bunds falling 0.02 percentage points to 2.47 per cent.

The yield on 10-year UK government bonds fell 0.02 percentage points to 3.62 per cent after UK gross domestic product came in stronger than expected, with year-over-year growth flat, compared with expectations of a 0.2 per cent fall.

Brent crude rose 1.4 per cent to $82.75 per barrel.

Additional reporting by Kana Inagaki in Tokyo, Kaye Wiggins in Hong Kong and Philip Stafford in London

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