Phil: In light of recent liquidity issues with certain regional banks, US regulators took the following actions.
One, under the Systematic Risk Exception, Treasury Secretary Yellen instructed the FDIC to quote, complete its resolutions of Silicon Valley Bank and Signature Bank in a manner that fully protects all depositors, both insured and uninsured, end quote.
Two, the Fed and Treasury also announced the Bank Term Funding Program, or BTFP, which will provide loans up to a year in length to federally insured banks in return for eligible collateral. The Fed facility would value collateral at par rather than at market value. This will allow banks to fund potential deposit outflows without realizing losses on depreciated securities.
And finally, regarding the discount window—which is the lending program between banks and the Fed—the Federal Reserve stated, quote, depository institutions may obtain liquidity against a wide range of collateral through the discount window, which remains open and available. In addition, the discount window will apply the same margins used for the securities eligible for the BTFP, further increasing lendable value at the window, end quote.
The stress in the financial system has shifted expectations for future Federal Reserve monetary policy. As of March 8th, the market expected the Fed to raise the overnight rate 0.50% on March 22nd and continue hikes reaching 5.9% in September. Intra-day pricing as of today shows the market participants now expect a quarter-point hike in March with the possibility of no Fed action at the March meeting. Futures are now pricing in the likelihood of rate cuts in coming quarters as well.
In response to recent events, we have seen a significant flight to quality. As such, Treasury yields have fallen precipitously across the entire yield curve. This shift in yields represents one of the more significant short-term movements in decades. Investment-grade credit spreads have widened in recent days but remain below the levels of last October and well below levels seen during the 2020 pandemic. Events over the past week have compounded this equity volatility of the past year, but even with the recent selloff the US stock market remains above the lows seen last October.
So what's the bottom line? While it may be tempting to get out of markets during times of volatility, remember to keep a historical perspective and focus on the long term.
Making Sense In Brief Outro Slide
Brent Ciliano
CFA | SVP, Chief Investment Officer
Capital Management Group | First Citizens Bank
8510 Colonnade Center Drive | Raleigh, NC 27615
brent.ciliano@firstcitizens.com | 919-716-2650
Phillip Neuhart SVP, Director of Market and Economic Research
Capital Management Group | First Citizens Bank
8510 Colonnade Center Drive | Raleigh, NC 27615
phillip.neuhart@firstcitizens.com | 919-716-2403
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