The US Dollar is under the pump to start the week as uncertainty from the fallout of the collapse of Silicon Valley Bank (SVB) permeates markets. Signature Bank also fell into receivership over the weekend, but the Federal Reserve and the US Treasury Department have moved swiftly to provide a backstop to minimise contagion. Nonetheless, everything from credit default swaps to Asian tech companies to Argentinian bonds is facing scrutiny today. While the greenback is under pressure, Wall Street futures are notching up gains as the market appears to be comfortable at this stage with the steps that authorities have taken so far. Most notably, authorities have reassured depositors at these banks that they will be able to withdraw their money and that the Federal Reserve will provide liquidity for eligible financial firms. The Federal Reserve announced that “it will make available additional funding to eligible depository institutions to help assure banks can meet the needs of all their depositors.” Furthermore, they said, “additional funding will be made available through the creation of a new Bank Term Funding Program (BTFP), offering 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.”
Authorities Have Made it Clear That Any Government Assistance.
will be going to depositors and will not be used to bail out bond or equity investors. The Treasury Department has recognised that other banks are in a similar position as SVB and Signature Bank, but they have said that it is a very different situation to 2008. US President Joe Biden will be speaking on Monday morning US time on the SVB situation, and his administration will be briefing Congress. This episode has disrupted the outlook for rates going forward ahead of next week’s Federal Open Market Committee (FOMC) meeting on the 22nd of March. The market had previously been leaning toward a 50 basis point hike but now sees 25 bp as more likely. To complicate matters, the Fed has gone into a blackout period, meaning that board members will not be making any public comments until after the meeting. Expectations of the terminal rate of the Fed funds target rate have been lowered from near 5.70% last week to around 5.13% today. The 2s 10s yield curve is inverted by only -75 bp, more than 30 bp tighter than last Wednesday. The strong US jobs numbers on Friday paled against the small banking crisis and US CPI on Tuesday may not have the impact on the FOMC meeting that it previously would have. Treasury yields have collapsed and if they continue to trade lower, The US Dollar might be further undermined. The 2-year note is now around 70 bp lower than the peak of 5.08% last week, which was the highest yield since July 2007. Conversely, if the authorities are successful in corralling contagion risks, Treasury yields might find support.
DXY (USD) INDEX AGAINST TREASURY 2- AND 10-YEAR YIELDS