The failure of Silicon Valley Bank and the government rescue of its depositors are ripping through market bets on everything from the economy to the US interest-rate outlook.
Authorities rushed to stem panic about the health of the US financial system by pledging to fully protect depositors’ money following the collapse of SVB and offer one-year loans to banks under easier terms than usual. That should boost sentiment in the short-term but could lead to moral hazard in the long-term, according to market participants.
Here’s what investors and strategists are saying about how the latest developments could impact markets:
Sentiment Boost
Priya Misra, global head of interest rates strategy at TD Securities.
“Even if SVB is sold, concerns about the liquidity and capital position of the banking system will remain. The new BTFP program provides liquidity for banks and should go a long way to help sentiment. We would expect bank lending standards to worsen further, adding downside risks. We remain long 10s, even though we expect the Fed to keep hiking due to high inflation. We forecast a 25bp Fed hike in March and a terminal rate of 5.75%.”
Moral Hazard
Michael Every and Ben Picton, strategists at Rabobank
“If the Fed is now backstopping anyone facing asset/rates pain, then they are de facto allowing a massive easing of financial conditions as well as soaring moral hazard. The market implications are that the US curve may bull steepen on the view that the Fed will soon actively pivot to line up its 1-year BTFP loans with where Fed funds rates then end up; or it may bear steepen if people think the Fed will allow inflation to get stickier with its actions.”
No Guarantee
Paul Ashworth, chief North America economist at Capital Economics
“Rationally, this should be enough to stop any contagion from spreading and taking down more banks, which can happen in the blink of an eye in the digital age. But contagion has always been more about irrational fear, so we would stress that there is no guarantee this will work.”
Fed Pause
Jan Hatzius and team at Goldman Sachs Group Inc.
“In light of recent stress in the banking system, we no longer expect the FOMC to deliver a rate hike at its March 22 meeting with considerable uncertainty about the path beyond March.”