US 2-year yield plunges by most since 2008 after SVB collapse

(Updates prices; adds Goldman call details, analyst quote, and chart)

By Harry Robertson and Amanda Cooper

LONDON, March 13 (Reuters) - Short-dated U.S. Treasury yields tumbled on Monday as the collapse of Silicon Valley Bank prompted investors to drastically scale back expectations of a big Federal Reserve rate hike and seek the safety of government debt.

The yield on the 2-year Treasury note was last down 39 basis points (bps) at 4.192%, its lowest since Feb. 3 and the biggest one-day drop since the financial crisis of 2008.

It also recorded its biggest three-day drop, at 87 bps, since the Black Monday stock market crash in 1987. Yields move inversely to prices.

U.S. banking regulators pledged on Sunday to ensure depositors at the now-shuttered Silicon Valley Bank would have access to their funds. On Monday, HSBC said it would acquire SVB's British unit.

In light of the crisis, Goldman Sachs predicted the Fed would not raise rates at its meeting next week at all, helping drive a massive rally in short-dated government debt on Monday.

"We no longer expect the FOMC (Federal Open Market Committee) to deliver a rate hike at its next meeting on March 22," Goldman analysts, led by chief economist Jan Hatzius, said in a note.

"We have left unchanged our expectation that the FOMC will deliver 25 bp hikes in May, June, and July and now expect a 5.25% to 5.5% terminal rate, though we see considerable uncertainty about the path."

The 10-year Treasury yield was last down 16 bps at 3.534% , also the lowest since Feb. 3.

Money market pricing shows investors believe there is roughly a 55% chance of the Fed holding rates in the current range of 4.5% to 4.75%, and a 45% chance of a 25 bps hike.

"On the margin the Fed will press ahead by 25 next week," said Jan von Gerich, chief analyst at European banking group Nordea. "But the discussion of whether they will hike by 25 or 50, that is gone."

Von Gerich added: "If markets remain in a crisis mood, or in a very volatile set-up, then the Fed doesn’t want to increase that volatility even further. But for now, I think that 25 bps next is a reasonable baseline."

U.S. stock market futures found something of a footing after equities fell on Friday.

S&P 500 futures were down 0.15%. However, the VIX index, a gauge of expected U.S. stock market volatility, picked up 3 points to 28.06, having hit its highest since October on Friday at 28.97.

European short-dated bonds also rallied dramatically, with Germany's 2-year yield plunging 40 bps to 2.669%, the lowest since Feb. 9.

The European Central Bank sets interest rates on Thursday. Pricing in money markets shows traders think a 50 bps hike, taking rates to 3%, remains the most likely option, although some expect a 25 bp increase.

(Reporting by Harry Robertson, Amanda Cooper, and Stefano Rebaudo; Editing by Dhara Ranasinghe, Kirsten Donova)