(Bloomberg) - 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 and offer loans to banks under easier terms than usual.
Market participants have said the move should boost sentiment in the short-term but could lead to moral hazard in the long-term. And some of the biggest names in finance are weighing in with warnings.
Pershing Square founder Bill Ackman said more banks will likely fail, while DoubleLine Capital Chief Investment Officer Jeffrey Gundlach said the Treasury market is now signalling an imminent recession.
The new program will provide loans of up to one year in exchange for securities the Fed will value at par — 100 cents on the dollar — forgoing the discount it has traditionally required. However, the central bank said it will have recourse beyond that collateral, a likely acknowledgment some of the securities may be impaired.
The loans will be fixed at 10 basis points above where the overnight bank borrowing gauge known as OIS lies that day.
Here’s what investors and strategists are saying about how the latest developments could impact markets:
Bank Failure
Bill Ackman, Pershing Square founder
“More banks will likely fail despite the intervention, but we now have a clear roadmap for how the govt will manage them. Our govt did the right thing. This was not a bailout in any form. The people who screwed up will bear the consequences. The investors who didn’t adequately oversee their banks will be zeroed out and the bondholders will suffer a similar fate.”
Below Par
Jeffrey Gundlach, DoubleLine Capital chief investment officer
“So, if I have this right, the Fed will make loans on some of the collateral at a par valuation that is worth 40 percent less. Yikes.”
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 Mar. 22 meeting with considerable uncertainty about the path beyond March.”
Relief Rally
Erika Najarian, analyst at UBS Securities
“We think there could a sharp relief rally” in US bank stocks. “Our clients may continue to prefer flight to quality, which are ironically the ‘Too Big Too Fail But Now Have Been Regulated Into Having Tons of Liquidity and Capital Banks’”, namely JPMorgan, Bank of America and Wells Fargo.
Dollar Pressure
John Bromhead, strategist at Australia & New Zealand Banking Group
“The magnitude and speed of the policy response should quell fear in the system. Similar to the UK pension crisis back in September or October, policymakers were able to effectively ring-fence the risk and avoid any kind of systematic event. We are seeing risk-sensitive currencies bounce back as a result and that is dollar-negative. I suspect we could see further pressure on the USD, even if the financial systems concern fade.”
(Updates throughout)
By Ruth Carson
With assistance from Adam Haigh, Cormac Mullen, Joanna Ossinger and Ronojoy Mazumdar
March 13, 2023
