Silicon Valley Bank’s Impact on the Markets and Future Federal Government Moves
Article Provided by James Financial Partners
What happened?
Regulators seized the assets of SVB on Friday, March 10. There was a “run on the bank” because depositors were anxious about the overall health of the bank. This represents the second-largest bank failure in the U.S. and the biggest since 2008. In an unrelated move, Signature Bank of New York was taken over by regulators last weekend.
What has been the government's response?
On Sunday, March 12th the Treasury, Federal Reserve, and Federal Deposit Insurance Corporation released a joint statement mapping out their approach. They assured depositors at these banks that they would have access to all their money.
They went on to say, “Today we are taking decisive actions to protect the U.S. economy by strengthening public confidence in our banking system. This step will ensure that the U.S. banking system continues to perform its vital roles of protecting deposits and providing access to credit to households and businesses in a manner that promotes strong and sustainable economic growth.”1
The Federal Reserve and Treasury Department took the extraordinary step of designating SVB and Signature Bank as a systemic risk to the financial system, giving regulators flexibility to backstop the uninsured deposits. Regulators hoped that by protecting these deposits, they would bolster confidence in the banking system.
How have markets reacted?
The major stock market indices saw wide fluctuations on Monday, March 13, after falling the week before. Meanwhile, the banks’ issues sparked a rally in government bonds, with yields on the 10-year Treasury closing Monday at 3.55%, more than 40 basis points lower than a week earlier. Yields fall when bond prices rise.2
There also was volatility on the short-end of the yield curve, with the two-year Treasury note closing at 4.074% on Monday, down from 5% last week. Monday, the biggest one-day decline since 2008.2
Will this impact Fed action?
The rally in Treasury’s prices was partly fueled by a swing in investors’ interest rate expectations. On Monday morning, Federal funds futures showed a 64% chance that the Fed would still raise rates by 0.25 percentage point at its meeting next week and a 36% chance that it wouldn’t move at all, according to CME Group data. That compares to last Wednesday when investors believed there was almost an 80% chance that the Fed would lift rates by 0.50 percentage point at its coming meeting.3
That’s a big swing in expectations. It will be interesting to see how concern over banks or the consumer price inflation number coming out this week will influence the Fed’s action.
We expect the government’s quick actions will boost trust in the banking system, yet these events may have an impact on longer-term economic growth. We are keeping a close watch on the situation and are planning to provide you with additional updates as the situation evolves.
1. The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost. Asset allocation and diversification are approaches to help manage investment risk. Asset allocation and diversification do not guarantee against investment loss. Past performance does not guarantee future results.
2. Under the SECURE Act, in most circumstances, you must begin taking required minimum distributions from your 401(k) or other defined contribution plan in the year you turn 73. Withdrawals from your 401(k) or other defined contribution plans are taxed as ordinary income, and if taken before age 59½, may be subject to a 10% federal income tax penalty."
3. The return and principal value of stock prices will fluctuate as market conditions change. And shares, when sold, may be worth more or less than their original cost. Asset allocation is an approach to help manage investment risk. Asset allocation does not guarantee against investment loss. Past performance does not guarantee future results.
The content is developed from sources believed to be providing accurate information. The information in this material is not intended as tax or legal advice. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. This material was developed and produced by FMG Suite to provide information on a topic that may be of interest. FMG Suite is not affiliated with the named broker-dealer, state- or SEC-registered investment advisory firm. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security. Copyright 2023 FMG Suite.
Securities and Advisory services offered through Woodbury Financial Services, Inc., member FINRA and SIPC, and Registered Investment Advisor. Tyler James, Investment Advisor Representative of Woodbury Financial Services, Inc. James Financial Partners and Woodbury Financial Services, Inc. are not affiliated entities.
