US regional banks on verge of collapse: bond markets vehemently rejecting further rate hikes

After the dramatic collapse of SVB (Silicon Valley Bank), 16th largest bank in the US which had established itself as a highly niche lending platform to tech startups and workers & Venture Capital backed companies, there were high level debates and arguments as to whether it could have contagion effect to other parts of the banking system. Though US regulators were nimble to react and FDIC (Federal Deposit Insurance Corporation) quickly took over the troubled bank, enacting the standard insurance amount of $250,000 per depositor, per insured bank. However, it was far from saving the bank from experiencing one of the biggest bank runs in more than a decade!. UK arm of the SVB has been acquired by HSBC UK unit for symbolic £1. After SVB, the state regulators closed down the New York based Signature Bank, citing systemic risks.

As it became clear today, it has far reached consequences and well established regional banks in the US are falling like house of cards on fears of deposit capital flight. Equity value of First Republic Bank,PacWest Bancorp,Western Alliance Bancorporation collapsed over 70% on a single trading day before recouping the losses, following the press conference by US President, mentioning that both insured and uninsured deposits will be accessible and no loss will be borne by taxpayers.

The bond market showed humongous moves with yields dropping sharply on both long and short ends of the US treasury. 2-year treasury witnessed 100 basis point move within a matter of 7 days to touch 4.003%.
Similar trend is shown by UK gilts and German yields as well.

Some investors are believing that in light of recent events, the Fed will not do any more rate hikes in the federal funds rate, as evident by the moves in bond market today. However as per our view, it still remains much of an anticipation, with inflation data yet to be received and perceived accordingly. As mentioned in our previous article (SEPTEMBER 29, 2022), the Fed will continue to do the rate hikes unless something breaks in financial markets and/or inflation shows clear signs of heading towards 2% proximity. The next FOMC meet will be crucial in determining which logical operator out of and/or will be considered.

Last updated on May 14th, 2023 at 12:26 pm