March saw the spectre of another banking crisis raise its ugly head. It started with the chairman of the Federal Reserve, Jerome Powell, talking tough about inflation. The market started to acknowledge that interest rates would rise further and stay higher for longer. Markets anticipated that interest rates would be hiked by another 0.5 percentage points at the Fed’s March meeting, with the US Treasury 2-Year Bond yield moving up to 5.0 per cent on 8 March, from only 4.0 per cent in February.
Then everything changed. A bank that many of us had never heard of had liquidity problems. Silicon Valley Bank (SVB) was subject to a run as its depositors sought to withdraw their money – no queuing outside a branch any more, just a click of a button. The bank could not meet the payments as it had invested its customers’ cash in US Treasury Bonds, believing them a safe and attractive investment.
If held to maturity, then maybe. The problem was the increase in interest rates over the past 18 months meant the Treasury bonds were trading at a loss. Selling to meet customer withdrawals would realise large losses – losses the bank could not afford. The Federal Reserve stepped in to guarantee the customers’ deposits – but not before the market feared a run on other US regional banks.