SVB Wasn’t the Only Thing to Fall

The 2 Year Treasury Yield fell from 5% to 4% in a matter of 3 days.

The 10 Year Treasury fell from 4% to 3.5%

The market’s expected federal funds terminal rate fell. This is the peak rate the market believes the fed will raise rates too.

The ongoing fallout from the “Sunday Savior” decision is that the market is starting to feel the Federal Reserve may pause their interest rate increases, citing the damage those increases have caused at least two banks. The Federal Reserve has a pretty damn good reason to now “pause and see” if the work they’ve already done is enough and inflation can continue to trend lower over the coming months without higher rates. If they continue to raise rates, they run the risk of additional strain and stress on the banking system and economy.

Why did interest rate increases cause so much strain on these two banks?

The reason is that the treasury bonds SVB held as reserves for deposit went down in value as interest rates rose. Interest rates and the value of bonds have an inverse relationship. One goes up; the other goes down. As depositors put money into checking and savings accounts, the bank buys bonds to earn interest on those funds until you ask for them back. With interest rates rising rapidly over the last year, the value of those bonds has decreased. When depositors asked for their money back in unprepared quantities, this forced the bank to sell those bonds at a lower price than where they purchased them. Suddenly, the bank finds itself upside down, and well, you know the rest.

Interest rates and inflation falling have historically coincided with stocks rising, so in the long run, these events could be a positive for the broader stock market.

Shean