We wanted to share a quick update in light of the recent news about Silicon Valley Bank (SVB) and discuss our thoughts on its impact on the markets and future Fed moves.
Actions taken by Mueller Wealth:
We have removed and sold out of our financial sector overweight about 2 months ago on 1/23/2023.
Regulators seized the assets of SVB on Friday, March 10. There was a “run on the bank” because depositors were anxious about the overall health of the bank. This represents the second-largest bank failure in the U.S. and the biggest since 2008. In an unrelated move, Signature Bank of New York was taken over by regulators over the weekend.
What has been the government's response?
On Sunday, the Treasury, Federal Reserve, and Federal Deposit Insurance Corporation released a joint statement mapping out their approach. They assured depositors at these banks that they would have access to all their money.
They went on to say, “Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system. This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.”1
The Federal Reserve and Treasury Department took the extraordinary step of designating SVB and Signature Bank as a systemic risk to the financial system, giving regulators flexibility to backstop the uninsured deposits. Regulators hoped that by protecting these deposits, they would bolster confidence in the banking system.
How have markets reacted?
The major stock market indices saw wide fluctuations on Monday, March 13, after falling the week before. Meanwhile, the banks’ issues sparked a rally in government bonds, with yields on the 10-year Treasury closing Monday at 3.55%, more than 40 basis points lower than a week earlier. Yields fall when bond prices rise.2
There also was volatility on the short-end of the yield curve, with the two-year Treasury note closing at 4.074% on Monday, down from 5% last week. Monday, the biggest one-day decline since 2008.2
Will this impact Fed action?
The rally in Treasury’s prices was partly fueled by a swing in investors’ interest rate expectations. On Monday morning, Federal funds futures showed a 64% chance that the Fed would still raise rates by 0.25 percentage point at its meeting next week and a 36% chance that it wouldn’t move at all, according to CME Group data. That compares to last Wednesday when investors believed there was almost an 80% chance that the Fed would lift rates by 0.50 percentage point at its coming meeting.3
That’s a big swing in expectations. It will be interesting to see how concern over banks or the consumer price inflation number coming out this week will influence the Fed’s action.
We expect the government’s quick actions will boost trust in the banking system, yet these events may have an impact on longer-term economic growth. We are keeping a close watch on the situation and are planning to provide you with additional updates as the situation evolves.
We are here to serve you and address any concerns you might have. If you have any questions, please do not hesitate to reach out to us.
With your success in mind,
What’s Going On With The Banks?
| March 20, 2023