By Karen Brettell

(Reuters) – The collapse of two massive U.S. regional banks has pressured the U.S. bond markets right into a close to 180-degree flip from pricing in a extra aggressive Federal Reserve and is eroding expectations the dollar might resume a brand new rally to recent 20-year highs.

Emergency measures by the Fed and the U.S. authorities on Sunday to ensure financial institution deposits have did not reassure markets after Silicon Valley Financial institution and Signature Financial institution (NASDAQ:) collapsed.

Since Thursday, the tumble in short-term U.S. Treasury yields, which had been at 15-year highs, was the steepest since October 1987, and pulled the greenback down from three-month highs.

Two-year yields fell as little as 3.939% on Monday, down greater than a proportion level from a 15-year excessive of 5.084% reached final week, whereas 10-year yields dipped to three.418%, from greater than 4% final week.

The strikes come as traders rush for secure havens and regulate for a much less aggressive Fed within the wake of the financial institution failures. The greenback dipped 0.60% in opposition to a basket of currencies on Monday.

“The market is mainly saying that the Fed is finished right here,” mentioned Mazen Issa, senior FX strategist at TD Securities in New York. “It wouldn’t shock me if the market now will simply attempt to constantly fade the Fed and gained’t consider any type of realm of hawkishness that emerges, and it’s not clear whether or not or not the Fed will proceed to be hawkish.”

Fed Chairman Jerome Powell shocked markets final week when he mentioned that the U.S. central financial institution may reaccelerate the tempo of fee hikes because it battles still-high inflation and advantages from a nonetheless robust employment image. That despatched Treasury yields sharply increased and boosted the .

However that prospect now seems off the desk.

Fed funds futures merchants now see the Fed as almost definitely to depart charges unchanged when it meets on March 21-22, or increase charges by 25 foundation factors, a dramatic change from final week after Powell’s feedback earlier than congressional committees, when a 50 foundation factors fee enhance was considered because the almost definitely consequence.

Some banks, together with Goldman Sachs (NYSE:) and NatWest Markets, have additionally mentioned they now not count on the Fed to boost charges this month.

Merchants are additionally pricing for the Fed to chop charges this yr, with the fed funds fee anticipated to fall to three.80% in December, from 4.57% now. As of final week, merchants had largely given up on the prospect of fee cuts this yr.

“There are probably heightened recession dangers,” on the again of the monetary stability points, mentioned Jonathan Cohn, head of charges buying and selling technique at Credit score Suisse in New York.

Whereas the market could retrace a few of Monday’s sharp strikes, “there are these type of prevailing questions across the future provision of credit score, of financial institution lending, that should be answered earlier than markets are going to cost as aggressive of a mountaineering cycle as they beforehand had been,” Cohn mentioned.

Fed officers are in a blackout interval earlier than the March assembly, which leaves a dearth of steerage on the extent to which the monetary stability dangers could alter their view on additional tightening.

Even when they repeat their dedication to bringing down inflation, traders could also be unlikely to embrace the message to the extent they did solely final week.

“If the market’s assumption as lately as per week in the past was the Fed can and can proceed to hike it doesn’t matter what, that’s now not, I feel, the view, (and) it’s going to be very tough for the market to come back again to that view,” mentioned Brian Daingerfield, head of F10 FX technique at NatWest Markets in Stamford, Connecticut.

“From a greenback perspective, that’s essential as a result of the resetting of Fed expectations ever increased was a giant a part of the greenback rally we had seen earlier than these strikes,” he added.