Almost 15 years to the day after Bear Stearns failed in 2008, and was subsequently sold to JPMorgan Chase, news broke that Silicon Valley Bank had failed and regulators were taking over. For those of us who were investing during the financial crisis, seeing the second largest bank collapse in U.S. history definitely brings back terrifying memories. But this is not the financial crisis.
In the last couple of weeks, we have seen Silvergate Bank go into liquidation, and Silicon Valley Bank as well as Signature Bank taken over by regulators. This has led to fears of contagion and further bank runs that could destabilize the entire banking system that underpins our economy. But unlike the financial crisis, what led to the demise of these banks is not as widespread as toxic mortgage-backed securities were in 2008.
All of these banks were highly concentrated in venture capital, technology, and cryptocurrency. In the case of Silicon Valley Bank, less than 10% of its deposits where “retail,” and only approximately 3% of its deposits were under $250,000, the FDIC limit. When word got out that they were having issues, a classic bank-run ensued, and the regulators were forced to step in.
This weekend the Treasury, Federal Reserve, and FDIC issued a joint statement announcing a new Bank Term Funding Program (BTFP) to ensure depositors are made whole. As of Monday morning, the stock market is digesting the news well; however, the banking sector is still under some pressure.
We have a few key take aways from these events:
1. We are still in a bear market – so prudence and diversification are warranted.
2. A 0.50% rate hike from the Fed in March is unlikely – prior to the Silicon Valley Bank failure, a 0.50% rate hike was beginning to be priced into the Fed funds futures markets.
3. Treasury yields have likely peaked – the 10-Yr Treasury yield rose to over 4% but has now fallen below 3.5%. The 2-Year Treasury yield posted its biggest 3-day decline since the 1987 crash.
4. Credit spreads in bonds will likely widen – the difference in the yield between a treasury and a corporate bond with the same maturity is called the credit spread. When fear enters the market investors flee to safety and credit spreads widen.
5. Opportunities will be presented so be patient.
Please don’t hesitate to reach out to us with any questions.
Jeremy Nelson, Partner
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