Last Updated on March 10, 2023 by Bitfinsider
On Thursday, the self-proclaimed financial partner of the innovation economy unloaded a $21 billion bond portfolio at a significant loss to shore up cash, sending shockwaves through financial markets. The bank’s problems are said to be the outcome of the Federal Reserve’s (Fed) bold rate increases, which have caused bond values to fall and yields to rise. The two are moving in opposing directions).
The market is concerned that other lenders may face similar issues to SIVB. The sharp drop in US financial equities and their European counterparts demonstrates this. The KBW Nasdaq banking index dropped more than 7% on Thursday, its largest single-day drop since 2020.
Bitcoin and ether have both fallen by 8% in the last 24 hours, hitting two-month lows. Meanwhile, Treasuries, or US government assets, have seen safe haven movements. The 10-year yield was 3.85% at press time, down 15 basis points from its peak of 4% on Thursday. The two-year return has fallen from 5.07% to 4.83%.
“Another crypto-friendly bank, Silicon Valley Bank (SIVB), is under fire. The bank is widely regarded as one of the usual fallback choices for industry participants affected by Silvergate’s demise.
This could be the first time bond rates have fallen alongside equities and cryptocurrencies since the Fed started its tightening cycle last year – a classic case of risk aversion in which investors seek protection in bonds. Perhaps investors anticipate the Fed slowing its tightening cycle in the aftermath of financial system duress.
“Pressure on the US financial system is raising concerns about the Fed’s ability to continue with such a robust tightening cycle. This has resulted in a 25bp decline in US two-year Treasury rates in just two days. This is bearish for the dollar “Chris Turner, ING’s director of FX strategy, stated in a market report. Dollar weakness is typically good news for risk investments.
Fed funds futures data indicate that the likelihood of the Fed increasing rates by 50 basis points to the 5%-5.25% range later this month has dropped to 54% from 75% on Wednesday. The estimate for the terminal rate, or the point at which the tightening cycle is expected to stop, has also fallen to 5.5% from 5.65% earlier this week following Fed Chair Jerome Powell’s bullish statement.
According to ING, systemic risk could cancel out wagers on 50 basis point rate increases, but there is currently no evidence of a pervasive problem in the financial sector. As a result, yields and rate hike chances may recover, adding to bearish pressures on risk assets if payrolls data exceeds forecasts.
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