Bank Industry in the Spotlight

  • Yields are repricing lower as the fears of a widespread banking crisis gathered over the weekend. While we think the issues with Silicon Valley Bank were unique to that bank (more on that below), in the era of social media everyone is a banking expert with the view that it’s best to shoot first and ask questions later.  Currently, the 10yr is yielding 3.50% and the 2yr is at 4.08%, but it did dip as low as 3.99% earlier this morning. Such is the force of the flight-to-safety trade right now.


  • Last week the debate was whether the Fed would hike 50bps or 25bps at the March 22 FOMC meeting and now the question is whether they hike 25bps or pause. That’s quite the change in a few days but that is where we are.  Yields have repriced lower in both a flight-to-safety trade and in sympathy of lowered rate-hiking expectations by the Fed in light of the banking industry developments (see the latest rate hiking expectations below).


  • On a positive note, one of the Fed’s actions this weekend was to open a temporary lending facility for the next year offering to lend at par value versus market which should be a strong source of back-up funding for institutions that find a need for that in the days and weeks to come. Terms for the program are in the attachment.


  • While calm and rational takes right now are few and far between, Silicon Valley Bank had many idiosyncratic issues that made them unique in the banking industry. They were concentrated in the tech sector, in both assets and liabilities, and that led to a reliance on large, uninsured deposits which made the bank susceptible to the type of run that it experienced last week once rumors spread about the bank’s health. Also, the bank was highly dependent on its investment portfolio which was over 50% of assets with many of those investments purchased since 2019. The unrealized losses in the portfolio made the bank especially susceptible to a liquidity crisis once the large, uninsured deposits starting flowing out the door.


  • Most banks operate with a much more diversified and insured deposit base, so we view the current situation as more a one-off and not systemic. But having said that, all banks are suffering under unrealized losses in their investment portfolios which does crimp a potential source of liquidity. That’s why the Fed’s lending program should alleviate some liquidity stresses that those unrealized losses have created should banks need to access additional funds.


  • Obviously, the banking industry is under the spotlight right now, and with the explosion of social media since the Great Financial Crisis a lot of misinformation can spread quickly which can influence depositors to shoot first and ask questions later.  Suffice it to say, the next few days, and possibly weeks, will be critical in assessing depositor behavior.


  • A week ago, we were anticipating the February jobs and CPI reports.  Obviously, events have taken the spotlight away from them, but they will still eventually weigh on the Fed’s policy path. While the Fed may indeed pause at next week’s meeting, this crisis will pass, and the Fed will return to its quest of quelling inflation.


  • We viewed the jobs report, with its moderating wage gains and increasing labor force participation as increasing the odds of a 25bps hike vs. 50bps. The inflation report, however,  is expected to post solid increases with the overall up 0.4% vs. 0.5% in January, while the core rate is also expected up 0.4%, matching the January gain.  The YoY overall rate is expected to dip to 6.0% vs. 6.4% and the core rate is expected to dip more grudgingly to 5.5% vs. 5.6% in January. Thus, the expected inflation numbers will likely force the Fed back into hiking mode once this current crisis passes.




Agency Indications — FNMA / FHLMC Callable Rates

Maturity (yrs) 2 Year 3 Year 4 Year 5 Year 10 Year 15 Year
0.25 4.84 4.71 4.66 4.66 4.77 5.24
0.50 4.83 4.68 4.60 4.55 4.63 5.12
1.00 4.82 4.65 4.57 4.51 4.54 5.00
2.00 4.64 4.51 4.43 4.43 NA
3.00 4.38 4.36 NA
4.00 4.32 NA
5.00 4.28 NA
10.00 NA

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Published: 03/13/23 Author: Thomas R. Fitzgerald