(News Bulletin 247) – Faced with the disgrace of several institutions across the Atlantic, the market is beginning to hope that central banks will ease the rate hikes that are hurting the most fragile banks. As a result, bond yields plunge.

When everything goes wrong on the market, an irreducible asset class often tends to resist: government bonds, or so-called “sovereign” bonds.

This is the case on Monday, when all the stock markets are suffering, fearing the repercussions of the forfeiture of the American bank SVB (Silicon Valley Bank), weighed down by massive withdrawals of customer deposits. This bank was closed and placed under the control of the FDIC, the American deposit guarantee agency, which is trying to find buyers. A second bank, Signature Bank, was closed and the FDIC will guarantee all of its deposits, like those of SVB.

While equity markets are falling, the value of sovereign bonds is rising because their rates are plunging. As a reminder, bond prices move in the opposite direction to their yields.

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Illustration of rate hike

Around 2:30 p.m., on the secondary market, the 10-year US rate moved to 3.483% against 3.705% on Friday, a significant decline in this type of market. The 10-year rate in Germany stands at 2.221% against 2.504% on Friday, the same thing for France, with a 10-year yield at 2.760% against 3% on Friday.

The movement is even more significant on short rates, the yield on the German two-year bond rising to 2.534% against 3.087% on Friday.

“The market thinks that faced with the risk of tensions in the banking market, central banks will be forced to slow down the pace of their monetary tightening”, underlines Louis Harreau, economist in charge of monitoring the European Central Bank (ECB).

The massive leaks of deposits suffered by SVB mainly come from tech companies, which themselves have been weakened by the rise in interest rates. “The SVB file reveals above all bad management, but this event probably would not have happened if we were not in a period of rate hikes by the American Federal Reserve (Fed), which reveals banking fragilities, explains Alexandre Baradez, from IG France.

Revised rate expectations

Especially since the key rates of central banks are no strangers to the losses that establishments may incur when they are taken by the throat. “When central banks raise key rates, bond rates rise and therefore logically the values ​​of sovereign bond portfolios held by banks or asset managers fall. These are latent value losses,” explains Louis Harreau.

However, these losses become very real when the institutions do not hold the securities to maturity and find themselves, on the contrary, forced to sell them in haste. This is what happened with SVB, which urgently sold 21 billion dollars in securities, posting a loss of 1.8 billion dollars.

In the face of fear over the SVB rout, Goldman Sachs estimates that the US Federal Reserve (Fed) should raise rates by 25 basis points (0.25 percentage points) after its next meeting on 22 next March, whereas it was previously counting on 50 basis points (0.5 point).

As for the ECB, Robert Halver, an analyst at Baader Bank quoted by AFP, judges that the European institution could “increase less” its rates, after the rate hike to come on Thursday. The members of the European institution had indeed undertaken to raise them by 50 basis points for this next meeting.

To see if these expectations are confirmed, Thursday March 16 for the ECB and Wednesday March 22 for the Fed.

In addition, the Fed introduced a new loan facility to ensure that more fragile banks can have the liquidity to honor withdrawal requests from their customers. What Deutsche Bank considers a form of “quantitative easing” (quantitative easing).

On these new loan facilities, the assets provided as collateral for the financing will not have to be valued at the market price but at their nominal value, a value fixed for the debt securities when they are issued. In other words, independently of their real value at a time t on the market.

“The Federal Reserve’s decision can be understood as follows: the American central bank is taking emergency measures to guarantee deposits and ensure the stability of the banking system. But this allows it to give itself some leeway to, on the other hand, raise its key rates. We can very well imagine, if tensions arose on European banks, which is not our scenario, that the European Central Bank would use a similar scheme”, analyzes Louis Harreau .