March was one of the most eventful and volatile months in the fixed income market in some time. The sudden demise of Silicon Valley Bank along with two smaller U.S. banks and one European (Credit Suisse, which was rescued by UBS) had a profound impact on financial conditions (bond spreads, lending conditions) and bond yields. Yields on Treasuries fell across the entire yield curve — the two year by 79 basis points — even as the Fed raised rates for the ninth consecutive time to 4.75%-5%. All of this led to strong gains for the broad market: total return for the Bloomberg Barclays U.S. Intermediate Aggregate Index was 2.15%. The municipal sector also performed quite well: total return for the Bloomberg Barclays Municipal Index was 2.22%.
Any time a major financial institution fails with little warning (Silicon Valley Bank was the 2nd largest bank failure in U.S. history), the market implications will be significant. This is the first financial crisis-type event since the Great Financial Crisis and it comes after the substantial increase in interest rates last year. One implication will almost certainly be tighter lending standards for businesses and consumers alike, which is often a precursor to recessions due to the critical role played by credit in our debt-dependent economy. Another could be new regulations aimed at small-to-midsize banks, and still another could be the changes to the FDIC insured deposit framework. All of this bears close watching for potential impacts on companies and industries that may not yet be apparent. Read More…
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