US Treasury Yields Tumble on SVB Collapse

Yields tumbled as Silicon Valley Bank (SVB) collapsed. The collapse of SVB triggered a wave of risk aversion among investors, causing US Treasury yields to tumble. Fearing contagion risk, investors scrambled towards government bonds in search of safer yields, highlighting the intensity of the risk-off sentiment.

Is the SVB collapse a systemic event? Dominique does not believe the SVB collapse will be systemic, in part thanks to the fact it represents less than 1% of total US banking assets. Instead, she believes the SVB bankruptcy lowers the risk of a 50bp hike at the March meeting, in contrast to the increased risk of a 50bp hike caused by the positive NFP surprise on Friday.

Used car prices to end disinflation. This week, CPI (Tuesday) is expected rise 40bp MoM for core and we believe used car inflation could turn positive and end disinflation. Meanwhile, we are generally in line with consensus across most of the other important data releases this week including PPI, industrial production, and jobless claims.

Turning to market moves, US 10Y yields closed the week at 3.70% (-27bps WoW) compared to 4.61% (-26bps WoW) for the 2Y. The magnitude of the 2s10s inversion deepened to weekly lows of -107bps on Wednesday before closing the week at -90bps on Friday. The probability of recession increases with yield curve inversion.

Recession probabilities remain high. Our recession model, which uses the 2Y10Y part of the yield curve, assigns an 92% chance of a recession within the next twelve months (Charts 1 and 3). It signalled a 95% probability on Wednesday when the 2s10s inversion was at -107bps.  Meanwhile, the Fed recession model, which uses the 3M10Y part of the yield curve, produces a 59% chance of recession (Chart 2). Notably, both models are producing recession probabilities higher than that of the 2007-2008 Global Financial Crisis (GFC).

Background to Models

We introduced two models for predicting US recessions using the slope of the US yield curve. When long-term yields start to fall towards or below short-term yields, the curve flattens or inverts. This has often predicted a recession in subsequent months. Our model is based on the 2s10s curve compared to a model from the Fed that is based on 3M10Y curve. We believe that the 2Y better captures expectations for Fed hikes in coming years and is therefore more forward-looking.

Dalvir Mandara is a Quantitative Researcher at Macro Hive. Dalvir has a BSc Mathematics and Computer Science and an MSc Mathematical Finance both from the University of Birmingham. His areas of interest are in the applications of machine learning, deep learning and alternative data for predictive modelling of financial markets.

Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.

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