The banking panic that led to bond market chaos raised questions about the future of the Fed’s current actions, including quantitative tightening drawing liquidity out of the markets.
The Silicon Valley Bank collapse has pushed bond volatility and has heightened questions about how these markets function, putting a spotlight on the economy and Fed policy.
The volatility reignited long-running concerns about the bond market, where shocks have been more frequent and the ability to trade more difficult–this has been exacerbated by the Fed’s ongoing quantitative tightening program, a gradual reduction of trillions in securities it bought as a pandemic-era stimulus.
Bond Market volatility is at the highest level in 15 years, indicating that investors are reassessing the likelihood of rate hikes and a sense of panic in the market.
Over the course of three trading sessions, (March 9, 10, and 13) two-year Treasury yields fell a full percentage point, the biggest three-day drop since the 1987 market crash.
Paul Plante says
The National Review
“There Will Be No Soft Landing”
Story by Matthew Continetti
18 March 2023
To recap: On March 8, Silicon Valley Bank of Santa Clara, Calif., announced that its balance sheet was weak.
The bank held around $175 billion in deposits.
They needed to raise capital, but its management had parked too much money in long-term government bonds.
At the time of purchase, in a low-interest rate environment, those bonds had seemed safe.
Then inflation arrived.
Rates went up.
Silicon Valley Bank was forced to sell the treasuries at a $1.8 billion loss.
The next day, March 9, panic began to spread.
Ratings agencies downgraded Silicon Valley Bank’s credit.
Its stock plunged.
A run on the bank — with depositors demanding their money back — took off.
On March 10, Silicon Valley Bank collapsed.
Silicon Valley Bank is the largest financial institution to go under since the Global Financial Crisis in 2008.
Its sudden demise shocked investors into reexamining the financial sector.
The largest banks may rest on firm capital cushions.
What about regional banks?
Fear of instability caused depositors to flee these midsized firms.
Shareholders did too.
Signature Bank of New York was caught in the whirlpool.
To stop the contagion from spreading further, on Sunday, March 12, Treasury Secretary Janet Yellen, Martin Gruenberg of the Federal Deposit Insurance Corporation, and Federal Reserve chairman Jerome Powell made the following announcement: The federal government would guarantee deposits at Signature and Silicon Valley Bank.
President Joe Biden was quick to assert that the backstop is different from the Troubled Assets Recovery Program, or TARP, the controversial bank bailout of 2008.
And tax revenue won’t pay for the guarantee directly, an FDIC fee will — a fee levied on banks and passed on to consumers, who also happen to be taxpayers.
Biden and Yellen won’t say it’s a bailout.
Of course it’s a bailout.
In some ways this bailout is worse than in 2008.
After all, Congress passed TARP.
Congress is a bystander here.
And TARP set economy-wide rules and qualifications.
Biden’s intervention is discretionary and selective.
When she appeared before Congress on March 16, Yellen admitted that the unlimited deposit guarantee doesn’t apply to every bank.
It applies to systemically important banks.
Who decides which bank is systemically important?
As circumstances dictate.
Yellen tried to soothe Congress.
She tried to project strength.
“I can reassure the members of the committee that our banking system is sound, and that Americans can feel confident that their deposits will be there when they need them,” she told Senate Finance.
“This week’s actions demonstrate our resolute commitment to ensure that our financial system remains strong and depositors’ savings remain safe.”
The only advantage I have over other people is that since I am already poor, I have a lot less to lose than they.
And why do I keep thinking about the Weimar Republic?
Paul Plante says
“TREASURIES-Yields rise on bank sector optimism, weak 2-year auction”
By Karen Brettell
March 27, 2023
NEW YORK, March 27 (Reuters) – U.S. Treasury yields rose on Monday on greater optimism that stress in the banking sector will be contained and as the Treasury Department saw soft demand for a sale of two-year notes.
First Citizens BancShares Inc cheered investors when it said on Monday it would acquire the deposits and loans of failed Silicon Valley Bank, closing one chapter in the crisis of confidence that has ripped through global financial markets.
Treasuries have been volatile as investors try to gauge the impact bank failures will have on lending and growth and what that will ultimately mean for the path of interest rates.
Two-year yields rose 23 basis points to 4.008%, up from a six-month low of 3.555% on Friday but below the almost 16-year high of 5.084% hit on March 8.
The two-year yields hit a session high after the Treasury Department saw weak demand for a $42 billion sale of two-year notes, the first auction of $120 billion in short- and intermediate-dated supply this week.
The notes sold at a high yield of 3.954%, more than two basis points above where they had traded before the auction.
Demand for the notes was 2.44 times the amount on offer, the lowest ratio since November 2021.
Paul Plante says
“2-year Treasury yield rises back above 4%, recovering from bank crisis dip”
Tanaya Macheel, Sophie Kiderlin
March 28, 2023
U.S Treasury yields climbed on Tuesday as fears of a crisis in the banking sector were assuaged and investors assessed what could be on the horizon for the U.S. economy and Federal reserve policy decisions.
The yield on the 2-year Treasury was nearly 8 basis points higher at 4.041%.
Federal Reserve Governor Michael Barr on Monday released remarks about the banking sector turmoil, which he will present to two congressional panels on Tuesday and Wednesday.
In the comments, Barr referred to Silicon Valley Bank’s failure as a “textbook case of mismanagement” and noted that the Fed would investigate its processes around risk testing and assessment.
Paul Plante says
“TREASURIES-Yields rise as investors watch banks, wait on Fed”
By Karen Brettell
March 29, 2023
NEW YORK, March 29 (Reuters) – Most U.S. Treasury yields were higher on Wednesday as investors continued to evaluate whether recent banking stresses will be contained and what tighter lending standards emanating from recent bank failures will mean for Federal Reserve policy.
Yields have risen from six-month lows reached on Friday as stress in the banking sector appeared to subside, following the collapse of Silicon Valley Bank and Signature Bank earlier this month.
The Treasury Department saw soft demand for a $35 billion auction of seven-year notes on Wednesday, the final sale of $120 billion in short- and intermediate-dated debt supply this week.
The notes sold at a high yield of 3.626%, around a basis point above where they had traded before the sale.
The bid-to-cover ratio was 2.39 times, the lowest since November.