(bull steepening, underperforming BUNDS and all on 5x avg volumes with liquidity 'challenged')while WE slept; #BTFP; "Removing Our March Fed Rate Hike Expectation" -GS;
Good morning … Once again under the cover of night, rules have changed. We went out Friday wondering / thinking about SVB and that $250k insured deposit limit and then, last night THIS happened,
Joint statement from US Treasury, the Fed and the FDIC says the resolution of Silicon Valley Bank to be conducted “in a manner that fully protects all depositors. Depositors will have access to all of their money starting Monday, March 13. No losses associated with the resolution of Silicon Valley Bank will be borne by the taxpayer.”
The Fed announces new “Bank Term Funding Program” that will offer “loans of up to one year” to “banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par. The BTFP will be an additional source of liquidity against high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress”.
… which led to this,
ZH: Bonds, Bitcoin, & Bullion Surge After Fed Bailout, Rate-Hike Odds Plummet
All said another way, 2yy down ANOTHER nearly 30bps (so far)
… here is a snapshot OF USTs as of 727a:
… HERE is what another shop says be behind the price action overnight…
… WHILE YOU SLEPT
Treasuries have sharply bull-steepened overnight (still underperforming German bunds in doing the same) despite a US regulator rescue plan being announced for depositors at the few just-failed banks. Regional bank stocks are taking a hit this morning with EU banks -5.5% lower at 7am (down over -7% earlier). DXY is lower (-0.35%) but off earlier lows with front WTI futures -1.25%. Asian stocks were lower except among China-linked names, EU and UK share markets are all in the red (2% to 3% lower, roughly) while ES futures are showing +0.55% here at 7:10am. Our overnight US rates flows saw a 'monster' Asian session marked by a sharp bull steepening in curve. Our activity saw real$ selling the front-end and 2-way action in the long-end, generally. During London's AM hours the desk has seen net better buying into the bounce in yields off the earlier lows. HF's were a main buyer while banks were better sellers. Most of our London flow was 5's and in with liquidity 'extremely challenged' according to my colleagues. Overnight Treasury volume was massive at ~5x recent averages overall with 2's (805%) seeing the highest relative average turnover overnight.
…FFZ3, daily. In just 3 sessions, Z3 Fed Funds futures have reversed the entirety of a 100bp sell-off over the prior 23 sessions. For those needing a picture showing how something finally broke under the weight of the past year's hikes, this picture might be a decent cover shot.
… and for some MORE of the news you can use » IGMs Press Picks for today (13 MAR) to help weed thru the noise (some of which can be found over here at Finviz).
From some of the news to some VIEWS you might be able to use. Global Wall St SAYS:
UBSs Paul Donovan,
Two bank failures. Two questions.
The failure and bailout of two US banks raise two near-term economic questions: will lending standards tighten in the US (and elsewhere); and if standards do tighten, does that matter to markets?
The circumstances behind the bank failures were unique, and US authorities have moved quickly to provide liquidity to the financial system. This does not look like a systemic risk. However, if deposits start to churn while the banking system keeps overall deposits unchanged, individual institutions may decide to increase liquidity as a hedge (tightening lending standards in the process).
This is not 2007/8. There is no credit bubble fuelling the economy. However, weak pay bargaining power has made consumers, particularly low-income consumers, more dependent on credit. This has focused on the “unconscious” credit of borrowing to pay weekly bills. Tighter lending standards may further constrain this group.
The uncertainty around lending conditions may lead to speculation that the Fed could pause its policy tightening. Fed Chair Powell’s relentless “hike, hike, hike” approach to policy never stopped to consider the impact of past tightening. The uncertainty created by the June policy errors, and the failure to give a policy philosophy in the face of profit-led inflation added unnecessary risk to markets.
And from this we move TO a rather early morning REID,
… A few big picture observations on the whole SVB story now. The first thing to say is that this is why inverted yield curves pretty much always signal bad news ahead. They tend to always signal an eventual unwind of carry trades somewhere in the financial system or economy that were done in previous quarters or years. In my opinion, the yield curve works more through what it does for behaviour of economic agents/investors rather than what it tells you about what the market thinks of the economic environment. Many think that QE had distorted the signal of the yield curve and therefore an inverted yield curve is more sanguine in this cycle. I couldn't disagree more with this view as I don't care why the curve inverts, I just care that it does. The rest is a risk aversion / animal spirits trade.
Anyway, last week in fact saw two US financial institutions fail, and now three with Signature overnight. There was a slight shrug of the shoulders over Silvergate folding on Wednesday, given its crypto association, but an almighty storm when Silicon Valley Bank (SVB), the 16th largest US bank by consolidated assets, did the same on Friday. US deposit-taking bank defaults are not that rare but most of these are small institutions. For those under the FDIC, there have been 562 failures since 2001 (490 between 2008-2013, 31 since 2015) but this is the first for three years - the longest gap over this period. Since 2009 only 5% of US bank failures imposed losses on uninsured depositors. However, the average deposit level of these were $0.4bn and maximum $1.5bn, with most FDIC insured. SVB had around $175bn deposits at YE '22 with the vast majority not qualifying for FDIC insurance (<$250k). In terms of deposit-taking banks this is the second biggest bank failure in history behind Washington Mutual in 2008.
For those not following the story, the simplest explanation of SVB's demise is that they were super exposed to tech venture capital depositors who had been seeing cash burn as the tech bubble burst, whilst previously having loaded up their balance sheet with positive carry trades into bonds when deposits soared during the tech boom and ultra low rate environment circa 2021. Something always, always breaks when the Fed hikes, and with a deeply inverted curve now, the carry trade came unstuck once there was more demand from depositors to withdraw their cash for 3 reasons. 1) cash burn of tech companies, 2) higher deposit rates elsewhere as rates rose, and 3) the final fears, after the huge security sale mid-week, that the bank was in trouble. So ultimately we saw an irreversible bank run.
To us this is a symptom of a perfect storm of all but one of the problems we’ve felt would eventually hurt markets this year. SVB’s woes are a combination of one of the largest hiking cycles in history, one of the most inverted curves in history, one of the biggest bubbles in tech in history bursting, and the runaway growth of private capital. The one missing ingredient not involved here is a US recession. One can only imagine the contagion this story would bring if we also had a US recession at the same time. We don’t for now. However, it would be hard to say that this boom-bust cycle is deviating too far from the likely script at the moment. That being… too much stimulus -> very high inflation and an asset bubble -> aggressive central bank hikes -> inverted curves -> tighter lending standards/accidents -> recession….
And from Germany to a large FRENCH bank,
News & Views Credit Strategy: US Bank Funding Stress
In response to the closure of two US banks by regulators, on Sunday the US Treasury, Fed, and FDIC announced a backstop of the uninsured deposits at both failed banks. Separately, the Fed established a new Bank Term Funding Program (“BTFP”) to provide liquidity through the discount window to eligible banks, with bank collateral valued at par (no haircut), eliminating an institution’s need to quickly sell securities in times of stress. In our view, the swift policy response should help restore confidence in the banking system and minimize further deposit flight. We expect markets to take comfort in the Fed’s pledge to address liquidity pressures, but it remains to be seen if further policy action will be required.
We still see higher risks in those US Banks with concentrated deposit bases (excluding the Big 6), and expect a rise deposit betas to weigh on NIM going forward. We view the European banking system as less vulnerable, given the region is earlier in the tightening cycle and European banks have more traditional business models.
For credit markets broadly, we expect lending conditions to tighten further following the rapid failure at two banks. This development should weigh disproportionately on lower quality leveraged finance issuers, some of which have already lost access to capital. Sectors with greater exposure to higher rates are most vulnerable ( link, link).
The failure of SIVB, followed by closure of another bank, shows the side effects of excessive policy tightening, with cracks emerging as some business models start to become unsustainable.
BBG econ … I mean large French bank econ has more,
US Banks: the macro and market implications of the SVB failure and policy response
Calvin Tse, Carl Riccadonna, Luigi Speranza, Viktor Hjort
Silicon Valley Bank’s failure has created liquidity strains, and policy makers acted forcefully to address this on Sunday evening. The short term implication of the bank failure will be more competition for liquidity including rising deposit rates. The longer term implication will be tighter credit conditions, especially for corporate borrowers.
The joint action from the Federal Reserve, U.S. Treasury Dept. and Federal Deposit Insurance Corporation (FDIC) reflects a multi-pronged approach to both alleviate concerns related to uninsured deposits at SVB and Signature Bank, while also easing liquidity pressures more broadly among depository institutions. While shareholders and certain unsecured debtholders will realize losses, all depositors will be protected. At first glance, the proposed measures appear to be a formidable prescription to resolve funding risk, especially deposit flight. We believe these targeted, but forceful measures will avert the need to alter the course of monetary policy more broadly. As such, we continue to expect the Fed to hike 25bps in March.
Market reaction key: While the initial market reaction to the policy response looked favorable, the follow through over the next few trading sessions will reveal the extent of other underlying implications.
Then there’s Goldilocks,
FDIC, Fed, and Treasury Announce Policies to Stem Deposit Outflows; Removing Our March Fed Rate Hike Expectation
BOTTOM LINE: The Treasury, Federal Reserve, and Federal Deposit Insurance Corporation (FDIC) made two major policy announcements intended to stabilize the banking system in response to recent bank failures and the risk of continued deposit outflows. We expect these measures to provide substantial liquidity to banks facing deposit outflows and to improve confidence among depositors. In light of recent stress in the banking system, we no longer expect the FOMC to deliver a rate hike at its March 22 meeting with considerable uncertainty about the path beyond March.
From only 25bps hike expectation to ZERO POINT ZERO hikes we go in a single click.
And one for our inner stock jockey from Mike Wilson / MS
Long and Variable Lags Are Here; Growth Expectations Remain Too High
While this past week witnessed the sudden collapse of SVB, the real story for equity markets is the impact of the Fed's actions over the past year. Earnings growth expectations remain materially too high, and markets are now likely to price that risk more quickly.
… Rather than do a forensic autopsy on whathappened at SVB (see our banking analysts' reports), we will instead focus our attention on what this event may mean for equity prices more broadly.First, we would remind readers that Fed policy works with long and variable lags. Second, the pace of Fed tightening over the past year is unprecedented when one considers that the Fed has been engaged in aggressive quantitative tightening while raising the Fed Funds Rate by almost 500bps (Exhibit 1).
I should have quit while I’m behind. ADULT SWIM sign hangin’ once again so lets be careful out there … THAT is all for now. Off to the day job…