(Adds comment, bullets; updates prices) * U.S. two-year yields set for largest weekly loss since Oct. 1987 * U.S. five-year yields set for most weekly fall since Sept. 2001 * Fed funds futures price in 25-bps hike at next week's meeting By Gertrude Chavez-Dreyfuss NEW YORK, March 17 (Reuters) – U.S. Treasury yields stumbled on Friday, as investor worries about liquidity shortage in the banking system persisted despite financial rescues for beleaguered lenders Credit Suisse and First Republic Bank. U.S. two-year yields, which reflect interest rate expectations, were down more than 70 basis points this week, on track for their largest weekly fall since October 1987. U.S. five-year yields were on pace for their worst weekly performance since September 2001. On Thursday, Credit Suisse became the first major global bank to be bailed out since the 2008 financial crisis as fears of contagion gripped the banking sector. And major U.S. banks led by JP Morgan Chase and Bank of America Corp injected $30 billion in deposits into First Republic, salvaging a lender caught up in a widening crisis triggered by the collapse of two other mid-size U.S. lenders over the past week. But those actions were not enough to lift Friday's market sentiment. "We're heading into the weekend in a period of being in a semi-crisis mode and people like to take off risk and one way to do that are flight-to-quality trades such as Treasuries," said Ellis Phifer, managing director of fixed income capital markets at Raymond James in Memphis, Tennessee. "The biggest problem with the banking system is that it is confidence-based. When you lose confidence, that causes the bank runs. That's what all these governments are trying to do – shore up that confidence so it does not become a systemic problem." Banks also sought record amounts of emergency liquidity from the Federal Reserve in recent days following the collapse of Silicon Valley Bank and Signature Bank, Fed data showed on Thursday, unraveling months of central bank efforts to shrink the size of its balance sheet. Banks took an all-time peak of $152.9 billion from the Fed's traditional lender-of-last resort facility known as the discount window as of Wednesday, while also borrowing $11.9 billion from the Fed's newly created Bank Term Lending Program. Loans taken from the discount window topped the previous record of $112 billion in the fall of 2008 at the height of the global financial crisis. Volatility in the bond market soared to as much as 198.71 on Thursday, the highest since December 2008. The index was last at 167.96, suggesting that traders expect rates to move more than 10 bps over the next month. In afternoon trading, the yield on 10-year Treasury notes was down 16.8 bps at 3.416%. On the week, the 10-year yield has weakened by 28 bps, the biggest decline since November. U.S. 30-year bond yields fell 10.5 bps to 3.609%. A widely tracked part of the U.S. Treasury yield curve measuring the gap between yields on two- and 10-year notes reduced its inversion to -48.2 bps. Earlier in the week, at the height of the banking turmoil, the curve reduced its inversion to -28.6 bps, the narrowest spread since October, as investors reduced rate hike scenarios this year. The two-year yield slid 25 bps to 3.872%. Fed funds futures on Friday priced in a 25-bp hike at next week's Fed meeting, as inflation goals superseded banking sector concerns for now. The market is factoring in a pause at the May meeting and possible cuts after that. "Our view is that leading into next week's FOMC meeting the Fed is attempting a two-tier approach, where beefed-up discount window access and the new BTFP (Bank Term Lending Program) are used to ring-fence monetary policy from financial stability risks," wrote TD Securities analysts in a research note. March 17 Friday 3:01PM New York / 1901 GMT Price Current Net Yield % Change (bps) Three-month bills 4.3625 4.4702 -0.238 Six-month bills 4.5425 4.7243 -0.175 Two-year note 101-116/256 3.8416 -0.288 Three-year note 102-154/256 3.6967 -0.291 Five-year note 102-112/256 3.4592 -0.278 Seven-year note 103-90/256 3.4529 -0.240 10-year note 100-232/256 3.3913 -0.192 20-year bond 101-164/256 3.757 -0.114 30-year bond 100-136/256 3.5957 -0.118 DOLLAR SWAP SPREADS Last (bps) Net Change (bps) U.S. 2-year dollar swap 26.75 0.50 spread U.S. 3-year dollar swap 14.50 0.25 spread U.S. 5-year dollar swap 11.50 1.25 spread U.S. 10-year dollar swap 3.75 0.50 spread U.S. 30-year dollar swap -43.25 0.00 spread (Reporting by Gertrude Chavez-Dreyfuss; Editing by Nick Zieminski and Richard Chang)
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Mad Money or a mad call?
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