ACTV - What A World What A World

2023-03-14 02:45:00 ET

Summary

• We went from a complete re-pricing of further Fed rate hikes to a setting where safe-haven buying due to concerns surrounding the banking sector took center stage in Treasuries.
• Obviously, the headlines, and attendant money and bond market reactions, are being dominated by news surrounding the impacts of the beleaguered Silicon Valley Bank failure.
• The Fed has put in place a new facility, the Bank Term Funding Program (BTFP).

By Kevin Flanagan

After last week’s (and this morning's) headlines and bond market activity, the only thing that came to mind was that line from the Wizard of Oz. Incredibly, we went from a complete re-pricing of further Fed rate hikes to a setting where safe-haven buying due to concerns surrounding the banking sector took center stage in Treasuries. Let’s take a look at recent developments.

• Obviously, the headlines, and attendant money and bond market reactions, are being dominated by news surrounding the impacts of the beleaguered Silicon Valley Bank ( SIVB ) failure.

• The Fed has put in place a new facility, the Bank Term Funding Program (BTFP). This funding mechanism offers “loans of up to one year in length to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agency debt and mortgage-backed securities, and other qualifying assets as collateral. These assets will be valued at par.”

• It is estimated that BTFP could shield banks from $620 billion in paper losses. For some perspective, the original size of the Troubled Assets Relief Program (TARP) was $787 billion.

• The implied probability for fed funds has plummeted by more than 150 basis points (bps) for January 2024 since March 8th (Powell’s Semiannual Monetary Policy testimony), with essentially no rate hike being expected for next week’s FOMC meeting (as of this writing).

• Besides the fed funds rate, the Fed could also turn to their balance sheet and make changes to their quantitative tightening (QT) program if deemed appropriate.

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