Treasury Yields Rise As Unrealized Losses at Banks Are Set to Rise After Rate Hike On Wednesday

Barry Adams
20 Mar, 2023
New York City

Financial markets turned higher after Swiss regulators and the central bank engineered takeover of Credit Suisse by UBS. 

The move was widely anticipated by investors after Saudi National Bank, the largest stockholders in the troubled Swiss bank, was unable to add more capital in the bank citing regulatory limitations. 

Credit Suisse has been struggling with deposit outflows with the growing worries of the viability of the institution.

Global markets looked beyond the "shotgun wedding" between the two Swiss banks but ripple effects are expected to be felt by global investors for months to come.  

 In New York Treasury bond yields rebounded from the six-month lows and crude oil dropped to a new 15-month low after the expected increase in China's demand growth failed to materialize after the ending of the zero-Covid policy for more than a month.  

Despite the forced purchase of Credit Suisse by UBS, there is no end in sight for the capital shortfall at the U.S. regional banks and rising interest rates will only make unrealized losses larger in the banking system.  

Investors are also bracing for higher rates at the end of a two-day policy meeting of the Federal Reserve on Wednesday. The central bank is expected to increase rates by at least 25 basis points, despite the ongoing financial instability in regional banks. 

 

Indexes & Yields 

The S&P 500 index increased 0.7% to 3,942.71 and the Nasdaq Composite index advanced 0.2% to 11,646.56. 

The yield on 2-year Treasury notes increased to 3.92%, 10-year Treasury notes 3.44% and 30-year Treasury bonds advanced to 3.62%. 

Crude oil decreased 72 cents to $66.01 a barrel and natural gas prices edged fractionally lower to $2.29 a thermal unit. 

 

U.S. Movers 

Credit Suisse Group AG plunged 52% to 96 cents in New York trading after the troubled Swiss bank agreed to be acquired by the rival UBS. 

In a deal negotiated by the Swiss regulators and the Swiss National Bank, UBS agreed to pay 50 Swiss cents per share or $3.25 billion, significantly less than the expected price for shareholders. 

The Swiss National Bank agreed to provide up to 100 billion Swiss francs in liquidity and the Swiss government will offer a loss guarantee of up to 9 billion Swiss francs but UBS will be responsible for the first 5 billion Swiss francs of potential losses. 

Total assets held by Credit Suisse had declined to $70 billion just before the announcement of the transaction, indicating that a substantial part of the assets may be impaired or is expected to be impaired. 

The deal orchestrated by the Swiss regulators and the central bank will pay stockholders but will write down $17 billion of AT1 bondholders which generally have a higher priority than shareholders in the credit structure.

Regional banks rebounded in New York trading and Western Alliance Bancorp advanced 3%, PacWest soared 16% and Key Corp increased 4%. 

First Republic Bank plunged 15.9% to $19.30 after the rating agency Standard & Poor's lowered its rating on the embattled bank's bonds to B+ from BB+, deeper in the junk bond territory.