if the market cant price a riskfree treasury bond please dont ask me to price a stock one analyst says the fallout from the closure of three us banks in the span of a week is making it nearimpossible for analysts to determine a fair valuation for stocks as volatility in the us government bond market surges to its highest level in nearly 15 years market strategists say that is due in part to increasing uncertainty around how the federal reserve will react going forward as it attempts to balance a spate of risks to markets and the economy if you cant price bonds you cant price stocks at the root of the problem is the ice bofaml move index a gauge of implied volatility in the treasury market the index surged to 174 on tuesday its highest level since the middle of 2009 according to factset data as yields gyrated wildly between thursday morning and monday evening the yield on the 2year treasury note had plunged more than 100 basis points before rebounding a wild gyration that investors said was extremely atypical for the worlds mostliquid market for sovereign debt this essentially means traders of treasury options and interestrate swaps are bracing for the yield on the 2year treasury note to swing by 12 or 13 basis points on average every day over the coming months when market conditions are more placid these rates typically see much smaller moves of between two and three basis points a day said scott ladner chief investment officer at horizon investments what the market is telling you is we dont know how to price the riskfree asset ladner said during a phone call with marketwatch if the market cant price a riskfree treasury bond please dont ask me to price a stock  the 2year yield stood at 4217 late tuesday in new york bond yields move inversely to prices and some analysts expect these wild swings could persist in the coming days weeks and months as investors struggle to parse the feds next move as marketwatch explained last month shifting bond yields have a major impact on equity valuations because of a concept in finance known as the equity risk premium  that is the reward investors receive for buying riskier assets like stocks instead of riskfree assets like treasury bonds see buying stocks is just not worth the risk today these analysts say they have a better way for you to get returns as high as 5 of course the notion that treasury bonds are considered risk free doesnt mean theyre insulated from losses but theyre seen as a safer investment in part because investors can typically recoup their money by simply holding a bond to maturity the nowmurky outlook for fed policy could continue to make life difficult for investors in a number of ways as analysts attempt to anticipate how the fed might seek to balance the need to continue fighting inflation with fears of causing more damage to the us banking system economists at different investment banks have come up with a range of views for what the fed might do at its next policy meeting which concludes on march 22 economists at goldman sachs group gs natwest and barclays expect the fed wont raise rates at all assetmanagement giant blackrock inc blk still expects a rate hike as do economists at citigroup inc c and jpmorgan chase  co jpm at least one bank  nomura holdings  said it expects the fed to cut interest rates by 25 basis points while announcing plans to stop shrinking its balance sheet this plurality of views mirrors the volatility in fed funds futures which traders use to place bets on changes in fed policy over the past week just one week ago traders saw a high probability that the fed would hike interest rates by 50 basis points in march for the first time since december at one point these marketbased odds had shifted in the opposite direction with traders seeing about even odds that the fed would leave rates on hold or opt for a smaller 25basispoint hike like it did in february odds now favor a 25basispoint hike although traders still see a 35 chance that the fed will keep interestrates unchanged according to the latest data from the cmes fedwatch tool at the start of the year investors largely expected the fed would cut interest rates later in 2023 but a spate of hot data on the state of the us economy the labor market and inflation effectively forced them to change their minds at one point marketbased expectations saw the terminal rate climbing as high as 55 before the end of the year but a series of bank failures in the us has stymied this shift toward higher rate expectations problems started when silvergate bank closed its doors last wednesday due to issues with its client base of cryptocurrency firms the crisis accelerated when silicon valley bank was taken over by federal authorities on friday following a panicinduced run on deposits which also caused shares of regional banks to crater on sunday night the federal deposit insurance corporation along with the treasury department and federal reserve announced that a third lender new yorks signature bank had also failed to try and stem the panic the authorities said that depositors at both signature and svb would be able to access all their deposits on monday since the feds aggressive interestrate hikes over the past year helped ignite the crisis by forcing banks to brook large markedtomarket losses on their bond portfolios investors and analysts now expect that the fed will be more circumspect going forward for fear of sparking another crisis mohamed elerian chief economic adviser at allianz described the feds difficulties as stemming from a trilemma  or the fact that it must now attempt to balance three competing priorities delivering low inflation minimizing damage to growth and avoid unsettling financial instability he said in a tuesday tweet fed funds futures expect the fed funds rate target will end the year between 425 and 45 after peaking at between 475 and 5 in june that would suggest that the market only sees one more 25basispoint hike before the fed pauses the result of this is that the fed might find itself boxed in no longer able to be as aggressive in fighting inflation as it would have liked to be i feel very confident that if the svb hadnt failed the market would have started to price in a terminal rate of 6 in the coming months said stephen miran a cofounder of assetmanagement firm amberwave partners and a former senior adviser at the us treasury who served under thentreasury secretary steven mnuchin miran spoke with marketwatch on tuesday to discuss the details of the latest cpi data under normal circumstances the cpi report released on tuesday could easily justify the fed to shift back to rate hikes of 50 basis points according to several market strategists the cpi data suggested that the worst inflationary wave in more than 40 years continued to slow in february but some stockmarket analysts were troubled by what they saw beneath the surface on a yearoveryear basis the cpi number showed the pace of consumerprice inflation over the prior 12 months slowed to 6 in february down from 64 in january but the pace of services inflation appeared unsettlingly strong socalled supercore services inflation  which strips out rents to focus on transportation healthcare and other prices increased by 05 on a monthovermonth basis in february compared with a rate of between 03 and 04 in january meanwhile socalled core cpi which excludes volatile food and energy prices expanded at a pace of 05 on a monthovermonth basis in february compared with expectations for a gain of just 04 neil dutta head of economics at renaissance macro research said in a note to clients on tuesday that the latest data should have cemented the case for the fed to hike rates by 50 basis points next week but instead dutta expects they will opt for a 25basispoint hike which could lead to problems down the road todays cpi data are a reminder that the inflation fight is not overthere is a risk that inflation pressures become entrenched which could lead to more financial instability later dutta said in emailed commentary shared with marketwatch if theres a silver lining to be found its that  so far at least  the banking systems woes are helping to stoke expectations that inflation could slow more rapidly in the coming months according to a few marketbased gauges one of these is the fiveyear breakeven inflation rate a proxy for what investors expect the pace of inflation to be five years from now fell to 226 on tuesday according to data from the st louis fed the breakeven represents the spread between a fiveyear nominal treasury note and the yield on the treasury inflation protected security shortterm inflation expectations have fallen by an even greater degree showing the biggest drop since the advent of the covid19 pandemic according to callie cox a us investment analyst at etoro investors seem to think the fear of financial instability could make consumers and businesses more cautious and in theory an air of caution could do the feds job for them cox said us stocks advanced on tuesday helping to pare some of their losses from the past week the sp 500 gained 6480 points or 17 to 3920 while the dow jones industrial average rose by 33626 points or 11 to 3215540 the nasdaq composite  meanwhile gained 23931 points or 21 to 1142815 according to factset data all three benchmarks are still in the red since the beginning of march this content was created by marketwatch which is operated by dow jones  co marketwatch is published independently from dow jones newswires and the wall street journal