Market Commentary: SVB, Volatility, and Rates
Source: an overview of what’s happening in the market from Paul Uffelmann, Director, on the First National Financial capital markets team.
Good afternoon, markets are experiencing significant volatility as Silicon Valley Bank (SVB)’s sudden collapse and the implications for central banks interest rate trajectories are assessed.
• With over $200bn of assets, SVB was one of the 20 largest US banks. SVB failed and went into FDIC receivership on Friday; the largest failure since 2008, and the second largest in US history.
• The collapse was not a result of credit issues, rather it stemmed from “safe” US Treasuries and MBS that declined in value as interest rates rapidly rose over the past year. This triggered a bank-run whereby a significant amount of deposits were quickly withdrawn ($42bn on Thursday alone).
• SVB focused on serving start-ups and had very concentrated deposits (the vast majority of deposits were uninsured, over the $250,000 US deposit insurance threshold) which contributed to the rapid decline, but similar underlying issues exist in many smaller US banks
On Sunday Signature Bank, a bank with $110bn of assets, also failed. Consequently, on Sunday, US regulators announced a series of actions aimed at preventing contagion (and to make sure the Academy Awards were not ruined).
• All depositors, insured and uninsured, for both Silicon Valley Bank and Signature Bank will be made whole.
• A new Bank Term Funding Program that offers one-year loans to banks was established.
• Lending terms through the Federal Reserve’s discount window were relaxed.
• Once you have digested all of that, layer in US CPI tomorrow and the FOMC decision on March 22.
All of this has affected markets globally, with ongoing volatility today.
In the past week:
• Expectations for Bank of Canada rate changes by the end of 2023 have moved from one more 25bps hike to 75bps+ of cuts
• 2yr GoCs yields have fallen from over 4.3% to below 3.6%
• 5yr GoCs yields have fallen from over 3.6% to below 2.9%
• 10yr GoCs yields have fallen from over 3.3% to below 2.8%
Where are rates going from here? Your guess is as good as mine, but time will tell.