The Fed just got cooked
CPI tomorrow? LOL. Rates lead the Fed, now watch what happens next.
It’s never what you expect. It should have been high-yield credit, it should have been a crashing stock market, and it should have been a recessionary spike in unemployment. But instead, higher interest rates ultimately toasted poorly hedged banks with long-duration assets; an old-fashioned bank run ensued—as over $40 billion in deposits left Silicon Valley Bank for greener pastures, the entire premise of non-BofA, non-Citi, non-JP, non-Wells deposit banking entirely came into question. Not the question from the public the Fed was hoping for.
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The US is now in the middle of a banking crisis. As of right now, even with some of the largest banking failures in US history, the crisis is yet to show its full hand. We’ll tell you what to watch for.
After depositors started fleeing their bank-issued monetary instruments for higher-layer money, such as US Treasuries or money market funds holding the same, the Fed felt the need to respond with yet another emergency measure, the Bank Term Funding Program (BTFP). Slice it any way you want, this was another bank bailout, which theoretically could have saved SVB if instituted last week.
Front-end yields have collapsed, down over 1% in three trading sessions. The 2s10s curve dramatically steepened today by 40 basis points. Fed funds expectations fell to only a 50% chance of the Fed hiking next week. We discuss our expectations.
High-yield bonds and equities both struggled over the past two trading sessions. Volatility has been reintroduced, and it warrants a discussion as to just how far risk traders are willing to go in order to pressure the Fed to cut rates.
Bitcoin is winning in more ways than one. Its price is up over 20% from the post-Silvergate fallout, but millions around the US are realizing the true nature of bank deposits—they are merely a third-layer money form that outside of the FDIC-insured $250,000 have qualitatively no value when confidence falters.