While preceded by the collapse of lesser known Silvergate Bank, focused on crypto currencies, a bank run on Silicon Valley Bank triggered government intervention and reverberated through the banking sector, leading to the demise of much larger Credit Suisse as an independent bank.
The cause of the problem was as classic as it gets: The bank had invested much of its funds in long-dated US Treasuries. While having no real credit risk, these securities have interest rate risk to boot. A few days before the collapse, long-dated US Treasuries had lost some 15-24% over the past 12 months, depending on duration (10-16 years). As the bank had to sell these securities to fund deposit withdrawals (deposits of course have very short duration), losses were final and the game was over. The bank was done in by interest rate risk.
Market interest rates lost no time falling, as it now seemed that further key rate increases would have to be more subdued. That did not keep central banks from increasing their key rates this month, however. Unmoved by the banking unease, the Federal Reserve, the ECB, Bank of England and, for that matter, Norges Bank all increased their key rates in March.
Note also that interbank rates rose markedly. The soon to be retired LIBOR USD 3-month rate hit 5,19%, a level not seen since 2007. This is an indication of the contractionary effect that the banking problems entail; it is estimated that it corresponds to an interest rate increase of about half a percentage point. Roughly speaking, that is equivalent to the average reduction in market rates.
In both the US and Europe, the still negative term spread was notably reduced. While still looking like a recession signal, the strength of the signal was thus reduced. On the other hand, high-yield spreads rose by some 40 to 50 basis points.
In sum, then, market fundamentals were at best neutral this month.
Stock markets around the world were more concerned with the falling interest rates. After the initial shock, they rose to end the month higher, the S&P 500 by as much as 3.7%. One of the few exceptions was the Norwegian market, falling by 3.8% on oil prices declining for the third consecutive month.
Growth stocks did especially well this month, due to the falling interest rates. The MSCI World Growth Index rose by 6.3%, whereas its value stock twin fell by 1.2%. Year to date, these indices have returned almost 15% and less than 1%, respectively. With no fundamental improvement in growth prospects, this difference is clearly all about pricing.
For me, with the yield on 10-year government bonds ranging from 2.2% to 3.5%, that’s yet another reminder of interest rate risk.
Finn Øystein Bergh
Chief Economist & Strategist
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