US authorities raced over the weekend to put together a package of emergency measures that would snuff out fears about the health of the banking system.
(Bloomberg) — US authorities raced over the weekend to put together a package of emergency measures that would snuff out fears about the health of the banking system.
On Monday, it had limited success, at best.
US bonds rallied sharply and stock indexes recovered from their lows, but in the one sector that matters most right now — regional banks — losses piled up at a frantic clip. Shares of First Republic Bank sank 62%, Western Alliance Bancorp 47% and PacWest Bancorp 21%, tripping multiple trading halts along the way.
The message investors are sending is clear: the emergency measures, which include guaranteeing all depositors’ money and providing easier loan terms to banks squeezed for cash, may not be enough to protect banks that even vaguely resemble the three regional institutions that collapsed into government hands in recent days.
“What shakes investors to their core is the continuous aftershocks that come after something like this,” said Thomas Thornton, founder of Hedge Fund Telemetry. “You’re always on edge. There’s a lot of risk left in this market.”
The fallout spilled into the credit markets as well. Investment-grade financial debt slumped, while US corporate credit risk soared to a four-month high.
Investors are “rushing for the exits without thinking twice,” Adam Crisafulli, founder of New York-based Vital Knowledge, wrote in a note to clients.
All the news in markets wasn’t bad on Monday, though. The rally in Treasuries, one of the biggest seen in decades by some measures, brings some much-needed relief to the balance sheets of those banks saddled with the same sort of long-term loans and bonds that the ill-fated Silicon Valley Bank had loaded up on. This helped shares of First Republic, PacWest and Western Alliance close up their lows of the day.
The frantic demand for Treasuries, which sent yields on some notes plunging more than half a percentage point, was fueled by traders’ sudden realization that the Federal Reserve is unlikely to push interest rates much higher and that a recession is now all but inevitable.
Its quest to tame inflation, the thinking now goes, comes second to the health of the nation’s bank sector. Investor concern has focused on the regional banks that weren’t subject to the same sort of regulatory scrutiny in recent years as the big Wall Street banks.
The US system of Federal Home Loan Banks, a key source of cash for regional lenders, is ramping up the amount of cash it has available to deploy as SVB’s failure raises expectations more banks will need help.
Traders in swaps markets have downgraded their bets for another quarter point by the Fed next week. Goldman Sachs Group Inc. economists as well as money managers from Pacific Investment Management Co. are saying the Fed could take a breather after ratcheting up rates to the current range of 4.50-4.75% from 0% in just 12 months. What’s more, some are betting the Fed will cut rates three times in the second half of the year.
That plunge in yields helped buoy US stocks more broadly, with the S&P 500 Index steadying in the afternoon session after an early selloff. The index ended the day down 0.2%. The tech-heavy Nasdaq 100, which is sensitive to moves in interest rates, rose 0.8% as shares of the biggest technology names, including Microsoft Corp., Apple Inc. and Amazon.com Inc., climbed.
The tremors in the banking system and the prospect of a less hawkish Fed also pushed cryptocurrencies higher, with Bitcoin jumping 13%.
But all eyes were on banks. The KBW Bank Index, one of the main gauges for the financial industry, sank 12%, the most since March 2020. That followed a 16% plunge last week.
“The thought process is that the government agencies are willing to protect the depositors, but that seems to be it,” R.J. Grant, who oversees trading at KBW, said by phone. “Based on their actions, it signals that they don’t care about the equity of these banks.”
(Updates with closing share prices.)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.