(Bloomberg) - Financial stress among smaller US banks could prompt the Federal Reserve to pause its hiking cycle as soon as this month, according to Daniel Ivascyn, chief investment officer at Pacific Investment Management Co.
“A lot has changed over the weekend,” said Ivascyn, the manager of the $116 billion Pimco Income Fund, the world’s largest actively managed bond fund. “There has been a meaningful tightening of financial conditions and significant risk aversion that we don’t think is over. This is likely a multi-month adjustment process” for the financial system.
In the wake of SVB Financial Group’s Silicon Valley Bank collapsing on Friday and the seizure of Signature Bank by regulators, the KBW Regional Banking Index slid by as much as 12% on Monday, its sharpest intraday plunge since March 2020.
“This is the first time we have seen a meaningful trade off between the fight against inflation and financial conditions,” Ivascyn said in a phone interview on Monday. “We think policy officials are going to take notice. It’s possible that the Fed pauses in March and we do think there will be more reverberations around the banking sector.”
A number of observers, including Goldman Sachs Group Inc. and NatWest Markets, have already changed their calls for the March meeting to predict no change.
Swaps indicate around a one-in-two chance that the Fed will hike by a quarter point at its March 21-22 meeting. That’s a shift from last week, when at one stage a 50-basis-point increase was seen as more probable than a 25-basis-point move. At one stage on Monday there was a clear lean toward the market pricing no additional hikes as the most probable scenario, though the market has pared its moves since then.
The selloff in risky assets has heightened demand for Treasuries, sending the two-year lower at onse stage by nearly 60 basis points to 3.99%, with the benchmark heading for its steepest three-day decline since Black Monday of October 1987. Less than a week ago, the benchmark touched 5.08%, it’s highest yield since 2007.
By Michael MacKenzie