For one day, at least, financial markets have weathered the imposition of severe economic and financial sanctions on Russia.
The measures have not produced huge repercussions in the dollar funding markets or U.S. debt and
with the worst of the damage being limited to Russian markets. While the Moscow bourse was shuttered Monday, the
VanEck Russia exchange-traded fund
(ticker: RSX) dropped 30% in U.S. trading Monday. That would reflect the anticipated markdown in Russian equities plus the plunge of the ruble, which plunged about 23% against the dollar.
major U.S. stock indexes
had recouped much of their early losses with the
finishing the day in the plus column. U.S. Treasury yields resumed their move sharply lower, but with the biggest drops at the short end of the market as expected Federal Reserve interest-rate increases are pushed out further on the calendar.
While a number of analysts suggested over the weekend that financial sanctions on Russia could spill over into international money markets, for now, the impacts have been limited.
There was some stress indicated in the widening between term and overnight money rates, says John Brady, managing director for institutional sales at R.J. O’Brien, the Chicago institutional futures broker. (Technically, that showed up in the FRA-OIS spread, which stands for Forward Rate Agreements and Overnight Index Swaps.) Regulators are alert to the potential ripple effect that could result from curbs placed on Russian institutions and stay ready to provide liquidity.
All of which ignores “the elephant in the room, the Fed,” Brady adds in a phone interview. Odds of a half-point increase by the Federal Reserve at its March 15-16 policy meeting have all but disappeared, according to the CME FedWatch site, with an 89.6% probability of just a one-quarter-point lift from the current 0-0.25% target range for the federal-funds rate.
The main impact is that the market is pushing out its expectations of future Fed rate hikes. That’s most apparent in the sharp drop in the yield of the two-year Treasury note, the maturity most sensitive to expectations of future policy changes, of 16 basis points (hundredths of a percentage point) from Friday’s close, to 1.43% Monday.
Longer-term yields are down less, with the 10-year note at 1.836%, off 15 basis points. This is a reversal of the recent pattern of more pronounced rises in shorter-term yields, which had resulted in a flatter sloped yield curve. That historically is a sign of tighter monetary policy and a portent of slower economic growth.
The slight steepening of the yield curve implies less acute Fed tightening in the near future. Fed funds futures currently anticipate a 1.50-1.75% range by year-end, compared to a projected 1.75%-2% range predicted in early February. An eventual peak of 2%-2.25% is still expected, but not anticipated until June 2023, rather than in March or May of next year.
The real pain is being felt in Russian bonds, says Cliff Noreen, head of global strategy at MassMutual. While there is no trading to speak of, Russian government bonds are indicated in the 20s (that is, in the range of 20 cents-30 cents on the dollar) while Russian corporate bonds are indicated in the single digits.
The damage also is evident in the
iShares J.P. Morgan USD Emerging Markets Bond ETF
(EMB), Noreen adds in a phone interview. According to the website of BlackRock, sponsor of the $16 billion ETF, about 1.48% of the assets are in Russian Federation or agency debt. The ETF has fallen 3.4% since Feb. 18, just prior to when Russia’s invasion of Ukraine appeared imminent.
So far, the initial financial damage from the Russian sanctions to U.S. financial markets appears less than the worst fears—even if these are still early days.
Write to Randall W. Forsyth at firstname.lastname@example.org