Treasury Yields Rise on Monday Following UBS's Takeover of Credit Suisse

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U.S. Treasury yields rose Monday as investors became more optimistic on the stability of the banking sector after Swiss bank UBS agreed to buy its rival Credit Suisse.

At 4:15 p.m. ET, the yield on the 10-year Treasury was up by 9 basis points at 3.496%. The 2-year Treasury yield was trading at around 3.96% after rebounding to trade 11 basis points higher.

Yields and prices move in opposite directions and one basis point equals 0.01%.

Regional banks ticked upward on Monday, with the SPDR Regional Banking ETF (KRE) closing 1.2% higher. The ETF at one point rose 5% during Monday's trading session, but saw some of its gains reverse as First Republic shares slide 47%.

Investor confidence in the banking sector improved after the Swiss National Bank, the Swiss Financial Market Supervisory Authority and the Swiss government finalized the takeover of Credit Suisse by UBS, the two largest Swiss banks. As part of the deal, the Swiss National Bank and Swiss government also announced they would take measures to support the deal, including a loan of up to 100 billion Swiss francs ($108 billion).  

Shortly after UBS announced its takeover of Credit Suisse, the Fed announced a joint liquidity operation with several other central banks around the world. In a statement, the Fed said the new measure would "serve as an important liquidity backstop to ease strains in global funding markets, thereby helping to mitigate the effects of such strains on the supply of credit to households and businesses."

The Fed's next meeting is due to begin Tuesday, with a fresh interest rate policy decision expected Wednesday. A 25 basis point rate increase is widely expected as many believe the central bank will aim to find a middle ground between pursuing its goal of cooling the economy and supporting the financial system's stability.

"Our expectation is that the FOMC will raise the policy rate by 25bps, not 50bps," said Thierry Wizman, global FX and rates strategist at Macquarie. "As for what the Fed should do (as opposed to what it will do) we're inclined to side with the camp that says that the Fed should stop hiking rates altogether, and so not hike this week even."

"Our view isn't because we think that there's a high probability of a full-blown credit crisis, but rather because of the near-certain prospect of a coming credit crunch," he added.

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