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Markets shaken as another bank dives

By HENG WEILI in New York | China Daily Global | Updated: 2023-03-16 10:15
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The market for US Treasurys turned volatile on Wednesday after problems emerged at another bank — this time Credit Suisse — spurring a flight to safer investments.

Traders said the upheaval was fueled in part by worries that an economic downturn might be looming.

"Liquidity (in the Treasury market) is off and has the possibility to deteriorate further," said Michael Lorizio, a fixed-income trader at Manulife, the Financial Times reported. "It makes sense that given the volatility, bid-ask spreads have widened."

Major US bank stocks also took some hits as the Dow Jones Industrial Average closed 281 points lower on Wednesday.

Treasurys and other bond prices had been trending lower over the past year as the Federal Reserve continued its determined path of raising interest rates in an attempt to tame inflation.

But the recent failure of two US banks has investors speculating that the Fed may pause the rate hikes at its meeting next week, due to concern over the economic fallout from the troubles of Silicon Valley Bank in California and Signature Bank in New York.

Hence, traders piled back into Treasurys and other safe investments Wednesday, lifting their prices while driving down their interest rates. Prices and interest rates on bonds move inversely.

The ICE BofA Move Index, which measures bond market volatility, hit its highest levels in at least three years, when the stock market crashed in March 2020 at the onset of the COVID-19 pandemic.

Scott Ladner, chief investment officer at Horizon Investments, told "What the market is telling you is 'we don't know how to price the risk-free asset.' If the market can't price a risk-free Treasury bond, please don't ask me to price a stock."

John Sheehan, a fixed-income portfolio manager at Osterweis Capital Management, told The Wall Street Journal: "People don't want to be caught with the next Silicon Valley Bank or the next Credit Suisse. They're buying what they think will outperform."

Credit Suisse is far larger than SVB and considered systemically important to the global financial system.

Genevieve Roch-Decter, a chartered financial analyst, tweeted Wednesday to her 360,000 followers: "Silicon Valley Bank had about $209 billion in assets. Credit Suisse has about $578 billion in assets. This is a much bigger problem in the making."

The appearance of two potential banking crises "caused a dramatic repricing of the fixed-income curve and a huge surge of volatility", Donald Wilson Jr, chief executive of DRW Holdings LLC, a Chicago trading firm, told the newspaper.

Ammar Al Khudairy, the chairman of the Saudi National Bank, Credit Suisse's largest shareholder, was asked Wednesday if the bank would invest more in the Swiss lender. He replied "absolutely not", a response that alarmed investors.

"The trading levels have become somewhat a crisis in confidence in Credit Suisse," said Mark Heppenstall, president of Penn Mutual Asset Management, reported "People are looking for any way possible to get protection."

Shares in the Swiss lender plunged more than 30 percent at one point on Wednesday to a record low of 1.56 Swiss francs ($1.67) a share, after the Saudi bank ruled out providing it with fresh funding because of regulations that cap its stake — now 9.9 percent — at 10 percent.

"Credit Suisse has been a (slow)-moving car crash for years it seems, but now today's news of course is happening in the vortex of SVB," wrote Peter Boockvar, chief investment officer at Bleakley Financial, reported CNBC.

"I think the problem European banks face, all of which have had to manage (negative interest rate policy) and massive QE (quantitative easing) for almost 10 (years) and managed to survive, is similar to many US banks in that they own too much duration with I'm sure plenty of negative-yielding bonds on their balance sheets which are guaranteed to lose them money if held to maturity," he added.

Still, European Central Bank policymakers are leaning toward a half-percentage-point rate hike Thursday, a source told Reuters, as they expect inflation will remain high.

Big US banks JPMorgan Chase and Citigroup each fell about 5 percent, and Wells Fargo lost 3 percent. Bank of America was down about 1 percent. The four banks have lost about $91 billion in market value combined over the past week, according to Dow Jones Market Data. Morgan Stanley closed down 5 percent.

Several US regional banks, which sustained a massive selloff but rebounded some on Tuesday, resumed their decline on Wednesday.

First Republic Bank dropped more than 20 percent after it was downgraded by S&P Global and Fitch Ratings, the Journal reported.

The prices of government bonds have experienced volatility not seen since the 1980s, when Paul Volcker was Fed chairman in an era when interest rates hit almost 20 percent.

On Monday, the two-year Treasury yield posted its largest one-day drop since the Black Monday market crash in 1987.

BlackRock CEO Laurence Fink described the current financial situation as the "price of easy money" and said in an annual letter that he expected more rate increases from the Fed.

Reuters contributed to this story.

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