The yield on the two-year Treasury note plunged in its biggest one-day slump in decades, while tech stocks rebounded from last week’s rout as the collapse of Silicon Valley Bank reverberated across trading desks.

In Monday’s chaotic session, yield on the two-year plunged by more than a half-percentage point logging the biggest three-day retreat since Black Monday of October 1987, as investors poured into haven assets. Some money managers have been taking profits in what may be a Treasuries short squeeze. The 10-year yield fell to a six-week low, while the dollar erased its gains for the year. 

The turmoil has caused a swift reassessment over the direction of Fed policy. Swaps traders are now pricing in a roughly 50 per centchance the Fed will hike by another quarter percentage-point later this month. Goldman Sachs Group Inc. economists as well as asset managers at the world’s largest actively managed bond fund from Pacific Investment Management Co. are saying the Fed could take a breather on the policy rate following the collapse of SVB. Nomura economists took it one step further, saying the Fed could cut its target rate next week.

Expectations had weighed a hike of as much as 50 basis points after Chair Jerome Powell addressed lawmakers last Tuesday.

The S&P 500 closed the day down 0.2%, after bouncing between gains and losses amid a rout in bank shares while the policy-sensitive Nasdaq climbed 0.8%, the most in over a week. The fallout from SVB’s collapse prompted President Joe Biden to promise stronger regulation of U.S. lenders, while reassuring depositors that their money is safe.

First Republic Bank plunged 62 per centas heightened worries about the state of U.S. regional banks triggered trading halts across the sector. The KBW Bank Index logged its biggest one-day drop since the start of the Covid-19 pandemic. 

“Problem is that nobody wants to be the last one in a room turning off the light. In other words, as soon as there is a problem in one bank, fear is real. Immediately everybody starts to say, ‘wait a minute, should I also have my deposits at bank ABCD etc.?,’” Mayra Rodriguez Valladares, managing principal at MRV Associates said on Bloomberg TV.

“Bond yields go up, which signal to the rest of the market that there is an increasing probability of default and loss severity. Even if the bank is well capitalized,” she added.

Treasury Secretary Janet Yellen said her office would protect “all depositors” at SVB. The government actions will also include a new lending program that Fed officials said would be big enough to protect uninsured deposits in the wider U.S. banking sector. Still, the sudden closure of New York’s Signature Bank by state regulators Sunday underscored the urgency of stabilizing the financial system.

“Warren Buffett said once, when a tide goes out, we find out who’s not wearing swimming suits and we found out already three folks that weren’t wearing swimming suits,” Ralph Schlosstein, Evercore ISI’s chairman emeritus told Bloomberg Television. “Over the weekend, the Fed showed up at the beach and started handing out swimming suits to everyone.”

Wall Street’s so-called “fear gauge” spiked, with the Cboe Volatility Index rising above 30 for the first time since October. 

Monday’s market moves come after risk assets got pummeled last week, with the U.S. stock benchmark suffering its worst week since September. Anxiety is also running high ahead of Tuesday’s consumer price index report.

Wall Street weighs in on the Fed’s next move: 

We forecast a 25bp Fed hike, but Powell talk and high CPI point to close call. The threat to our views comes from Fed Chair Powell. While Powell opened the door to a large March hike, he did not walk through it, noting that the upcoming decision will be determined by “the totality of the data.”

The Fed decision will incorporate two additional factors. First, this week’s CPI report. Second, the Fed will consider the potential for financial stress to build.

— Marko Kolanovic, JPMorgan Chase & Co. strategist

The Fed has to be off the table for now. They pushed on rates until something cracked, well guess what? Something cracked. 

To see QT stop would not be surprising, and maybe something to support the market. I think we’re back in crisis mode, and remember, to me, bank runs are way way way more important than inflation, so that’s what they’ve got to be arresting.

— Peter Tchir, head of macro strategy at Academy Securities

Pressure on banks dampens the rate outlook some, but decisive action on financial stability gives the Fed latitude to continue with rate hikes; 50 in March is not impossible as it would have been under a weak financial stability response and ongoing runs but looks very implausible – we still see 25 with a high bar to pause. 

— Krishna Guha, Evercore ISI head of central bank strategy

Led by ex-Federal Reserve chair after the financial crisis, Janet Yellen, the comprehensive set of measures has helped to ensure that doubts over systemic issues in the U.S. banking system have been put to bed. With a speedy response to the crisis delivered, the Fed can get back to its day job of raising interest rates to deal with inflation.  

— James Lynch, fixed income investment manager at Aegon Asset Management

Speculation about what the Fed’s going to do before we even see CPI is probably ill-founded. But if you look at the fed funds futures, they’re pricing in cuts in the fourth quarter and they’re pricing in the credible potential — like a 50 per centchance — that the Fed does nothing at the March meeting. So there’s too much noise around what else happens, what does this mean for monetary policy.

— Arthur Hogan, chief market strategist at B. Riley Wealth

Elsewhere in markets, oil dipped while gold rose on its allure as a haven.

Some of the main moves in markets:

Stocks

• The S&P 500 fell 0.2 per centas of 4:01 p.m. New York time
• The Nasdaq 100 rose 0.8%
• The Dow Jones Industrial Average fell 0.3%
• The MSCI World index fell 0.4%

Currencies

• The Bloomberg Dollar Spot Index fell 0.7%
• The euro rose 0.8 per centto US$1.0730
• The British pound rose 1.3 per centto US$1.2184
• The Japanese yen rose 1.3 per centto 133.33 per dollar

Cryptocurrencies

• Bitcoin rose 14 per centto US$24,393.75
• Ether rose 8.1 per centto US$1,684.29

Bonds

• The yield on 10-year Treasuries declined 17 basis points to 3.53%
• Germany’s 10-year yield declined 25 basis points to 2.26%
• Britain’s 10-year yield declined 27 basis points to 3.37%

Commodities

• West Texas Intermediate crude fell 3 per centto US$74.41 a barrel
• Gold futures rose 2.8 per centto US$1,918.70 an ounce