Sharp Swing In Treasury Yields After Traders Bet On Rate Hike Pause

Barry Adams
13 Mar, 2023
New York City

Shocked investors shunned stocks and bond yields spiked after more questions were left unanswered following the sudden closure of three mid-sized banks. 

In less than five days, three U.S. banks with a total deposits of $280 billion disappeared, raising questions about the effectiveness of bank regulators, auditors and rating agencies.  

Global investors are looking for answers about how the central bank missed the client concentration, bank run in the making and its implications to the wider banking system. 

Only a week ago Fed chairman Jerome Powell was reassuring lawmakers about the health of the U.S. financial system and supporting the narrative that banks are strong enough to sustain economic shocks. 

Stocks gyrated in early trading following a flurry of weekend activities as regulators and central bankers worked together to prevent the bank run contagion from spreading. 

 

Fed Trio Ramped Up Activities to Backstop SVB Fallout 

Federal Reserve and Treasury Department officials worked on the weekend to work out details of the plan to provide financial assistance to the failed Silicon Valley Bank. 

Regulators agreed to provide "financial backstop" to open the bank on Monday morning so the insured and uninsured depositors can access their accounts in full. 

However, the stock and bondholders of the bank will not be bailed out, clarified the U.S. Treasury Secretary Janet Yellen in an interview with CBS Face the Nation.  

The Federal Depositors Insurance Corporation, the insurance company that protects bank depositors, agreed to provide additional funds to support insured and uninsured accounts with the Silicon Valley Bank. 

The move essentially makes sure that the losses from the fallout are paid by the banking industry and Wall Street and not the federal government. 

The Federal Reserve also set up a separate program, Bank Term Funding Program to provide additional lending and extended term facility to one-year from the traditional 90 days in exchange of higher quality collateral valued at par and not at market value. 

The additional banking facility is designed to provide emergency lending to banks that may need access to cash and prevent bank runs from spreading to other institutions. 

The moves from the FDIC, Federal Reserve and the Treasury departments were widely welcomed by investors on Wall Street and depositors on Main Street. 

"Shareholders and certain unsecured debtholders will not be protected. Senior management has also been removed. 

Any losses to the Deposit Insurance Fund to support uninsured depositors will be recovered by a special assessment on banks, as required by law," noted the joint statement released by Secretary of the Treasury Janet L. Yellen, Federal Reserve Board Chair Jerome H. Powell, and FDIC Chairman Martin J. Gruenberg. 

 

U.S. Indexes Rebound from Morning Lows

Stock indexes closed higher and rebounded from the morning losses after confidence recovered and banks retraced some of the losses of the day. 

The S&P 500 index declined 0.2% to 3,855.76 and the Nasdaq Composite index increased 0.5% to 11,188.84. 

Investors awaited the release of consumer price inflation data before the market opening on Tuesday. 

 

Largest Drop In 3-day Treasury Yields Since 1987  

The bond yields edged lower and extended 3-day losses to the largest since 1987 after investors rushed to buy U.S. Treasuries following the close down of three banks in less than a week. 

The yield on 10-year Treasury notes moved by 50 basis points and 2-year Treasury notes by 90 basis points, the level volatility not seen in decades. 

The yield on 2-year Treasury notes traded down to 3.97%, 10-year Treasury notes declined to 3.57% and 30-year Treasury bonds to 3.71%. 

Crude oil declined $2.02 to $74.65 a barrel and natural gas rose 19 cents to $2.61 a thermal unit. 

 

U.S. Stock Movers 

Regional and mid-sized banks with large uninsured deposits led the decline for the third day in a row despite the additional assistance provided by the Federal Reserve Bank. 

First Republic Bank plunged 75.6% to $19.95 and the San Francisco-based bank said on Sunday it has received "additional liquidity" from the Federal Reserve Bank and JPMorgan Chase & Co. 

"The total  available, unused liquidity to fund operations is now more than $70 billion. This excludes additional  liquidity First Republic is eligible to receive under the new Bank Term Funding Program announced by  the Federal Reserve today," the bank said in a filing with the SEC on Sunday. 

 “First Republic’s capital and liquidity positions are very strong, and its capital remains well  above the regulatory threshold for well-capitalized banks," added Jim Herbert, Founder and Executive Chairman and Mike Roffler, CEO and President. 

PacWest Bancorp headquartered in Los Angeles, California dropped 42.43% to $7.11 and the Phoenix, Arizona based Western Alliance Bancorp plunged 69% to $15.20. 

JPMorgan Chase decreased 1.6% to $131.60 and Bank of America fell 3.3% to $29.27. 

 

European Markets Cautious Ahead of ECB Rate Decision

European markets fell sharply after banks declined for the second day in a row in the aftermath of the sudden collapse of Silicon Valley Bank. 

Financial markets reacted negatively following the demise of three banks in less than five days and just a few days ago the Federal Reserve chairman assured investors and lawmakers that the financial system is sound. 

The rapid demise of mid-sized banks with concentrated deposit bases also raised concerns about the effectiveness of the U.S. regulatory system, auditors and bond rating agencies.  

Moreover, counterparty risks are still not known and may take a few days or even weeks before investors learn of links with European institutions. 

Investors were also on the defensive ahead of the U.S. Consumer Price index data on Tuesday and the European Central Bank's rate decision on Thursday.  

 

European Indexes Closed at 2-month Lows 

The DAX index declined 3.04% to 14,959.47, the CAC-40 index dropped 2.90% and the FTSE 100 index fell 2.6% to 7,548.63. 

 

European Bond Yields Dropped Following Worldwide Decline 

The yield on 10-year German Bunds declined to 2.25%, French bonds fell to 2.79%,the UK gilts to 3.37% and the Italian bonds to 4.18%. 

The euro inched higher to $1.074, the British pound edged up to $.218 and the Swiss franc closed at 91.11 cents. 

 

Energy Prices Eased 

Brent crude oil fell $2.16 to $80.15 a barrel and the Dutch TTF natural gas fell Є3.58 to Є48.88 per MWh. 

 

Europe Movers 

Banks were under pressure on the worries that the sudden and swift collapse of Silicon Valley Bank could spread to other banks in the face of the rising rate environment. 

Credit Agricole, BNP, Societe Generale, Deutsche Bank, Lloyds Banking, Standard Chartered, Barclays and NatWest fell between 2% and 4%.  

Three U.S. banks with a total of nearly $280 billion in deposits were closed down in less than a week and required  emergency lending from the U.S. Federal Reserve Bank, U.S. Treasury and the FDIC to prevent the contagion spreading to other mid-sized banks.  

SAP SE declined 2.9% to €107.22 after the German-software firm agreed to sell its majority stake in the U.S.-based Qualtrics International to Silver Lake and Canada Pension Plan Investment Board. 

Qualtrics agreed to go private after investment companies offered a total of $121.5 billion or $18.15 a share. 

SAP controlled about 61% of the company on a fully-diluted basis.  

HSBC agreed to acquire Silicon Valley Bank's UK branch for £1 after the collapse of the California-based bank following the bank run. 

HSBC agreed to pay the token amount to keep the operations running and continue to provide financial services to the start ups and young tech companies. 

Phoenix Group Holdings PLC declined 2.3% to 603.65 pence after the UK-based insurance group reported wider loss in financial year 2022. 

Net loss in the full-year 2022 expanded to £1.7 billion from £706 million in 2021 and assets under management declined to £259 billion from £301 billion in the previous year.