A Couple of Bank Failures and a Near Miss

Wow! What a week! After I laid out the case last week for higher or lower interest rates ahead of upcoming scheduled data, little did I know that this would become irrelevant quickly. One day after my post, in a rapid turn of events, fearing imminent illiquidity, Silicon Valley Bank was shut down by regulators last Friday after depositors made a run on the bank. This was the second largest bank failure in U.S. history. Shortly thereafter, crypto-friendly Signature Bank suffered a similar fate, which became the third largest failure. Before the dust had settled, other banks including California residential lending-friendly First Republic Bank was in the crosshairs due to declining consumer confidence.

Over the weekend, the FED stepped in to backstop cash deposits at SVB, which provided an implicit guarantee of anything over the $250,000 FDIC insured amount. Reasons for the failure aside (this is enough material for a separate post), the bank did not deserve a bailout, but thank goodness the depositors got one because after the events of last Friday, if a solution to protect customer’s deposits had not been found, by Monday there would be runs on many banks with customers pulling out deposits in numbers that the system could not handle. Not to mention, companies that had much of their cash in SVB (and others) might not be able to pay their employees or continue operations. It was somewhat of a bailout, but mainly one of the depositors who did nothing wrong, and we are fortunate that it happened.

Despite this implicit guarantee of deposits, regional banks such as First Republic were hit hard this week and required another backstop in the form of a $30 billion facility formed by a handful of large financial institutions to guarantee deposits and ensure stability in the financial system. It truly seems that there are more than just a handful of banks that are too big to fail.

In the process, the markets got freaked out and there was a “flight to safety” in the form of increased demand for U.S. treasury bonds. The 2-year treasury yield dropped over a full point from peak to trough over the course of the week and the 10-year yield dropped about 60 basis points. The fear in the markets caused a larger drop in treasury yields and thus mortgage rates (declining by .5-.75% over a week based on various sources) than a lower than expected CPI or job growth number ever could. The market is now pricing in a lower terminal rate and a quicker FED pivot to cut rates, which, while the result of unsavory economic conditions, could help improve the housing market (or at least the pace of transactions).

For the record, the CPI increased by .4% month over month, which was in-line with expectations. The job report was mixed – the economy added 311,000 jobs (slightly more than expectations), the unemployment rate went up to 3.6% (from 3.4%), and average hourly earnings were up less than expected. The Producer Price Index actually declined month over month, which was a deflationary surprise. These reports together without the bank failures were somewhat mixed and likely would not have moved the markets much. In summary, despite correct assumptions about scheduled data, it is very hard to predict what is actually going to happen in any markets due to so many unforeseen events altering the full picture.