OPINION: The biggest fall in short-term bond yields since the 1987 crash is sending investors and central bankers a clear message about what’s to come after the SVB collapse.
The extraordinary price action on global markets is proof the collapse of Silicon Valley Bank is likely to reverberate for months to come, as investors find themselves caught between the need for central banks to continue their year-long battle against inflation, and growing worries that an overly leveraged financial system has become unstable.after US and European markets opened for the first time since the collapse and rescue of SVB on the weekend.While the 0.
Now, as Macquarie’s markets guru Viktor Shvets argues, bond markets appear to have decided that the collapse of SVB – and the shockwaves that will result from it – will force the Fed to change course.Shvets, who has long held the view that leverage and the need for liquidity would ultimately blunt the ability of central bankers to keep rates higher for longer, thinks bond markets are probably overreacting to dangers presented by the SVB collapse with their historic repricing.
The BlackRock Investment Institute, for example, says the SVB turmoil supports its call that the US economy is heading for a recession, with tighter financial conditions and credit supply likely to hurt confidence and lead to greater risk aversion.But BlackRock doesn’t see room for the Fed to give up its inflation fight, and says its SVB bailout could give it room to both stabilise the financial system and maintain its hawkish stance.
US regional banks saw some extraordinary moves on Monday night – shares in First Republic Bank plunged as much as 79 per cent, PacWest Bancorp fell 60 per cent, and Western Alliance Bancorp was down 85 per cent, as investors bet regulators would sacrifice bank shareholders to protect bank depositors, and the slide in Australia on Tuesday suggests fragility.
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