Things got really crazy in the bond market on Wednesday.
The yield on the US 10-year bond fell to as low as 1.86% at one point during the morning, and overall the yield declined as much as 33 basis points, or 0.33%. Priya Misra at Bank of America Merrill Lynch notes that this was largest single-day fall in yields since the Lehman Brothers bankruptcy in September 2008.
Stocks were also all over the place on Wednesday, with the Dow falling as much as 460 points before paring its losses to about 180.
But another side-effect of the action on Wednesday was the change in the market’s expectations for the Federal Reserve’s first interest rate hike. At one point on Wednesday, headlines from Reuters said that traders had pushed expectations out as far as the first quarter of 2016.
In a note on Thursday, analysts at Credit Suisse wrote that, “The extent of hike-expectations repricing amid the recent risk-off rally in rates has been striking.”
“The rally has not simply been a flight-to-quality bid to longer-dated Treasuries, but instead a wholesale reconsideration of Fed hike expectations spurred on, in part, by the Fed’s overt acknowledgment — first in the minutes and most recently by Vice President Fischer — that weak global growth might alter the path of the Fed’s removal of accommodation.”
This chart from Credit Suisse shows how traders have moved their expectations for the beginning of the Fed’s tightening cycle from the second quarter of 2015 to well into the fourth quarter of next year, the latest these expectations have been since May 2013.