Current position: Carefully Floating
Happy St. Patrick's Day! In honor of the holiday, we hope the candle is green.
Stocks are lower and mortgage bonds are higher, but vacillating, so far this morning.
The latest in banking headlines is that Silicon Valley Bank's holding company, Silicon Valley Financial, has filed for bankruptcy. Additionally, First Republic Bank, which was showing a lot of weakness because of its high amount of uninsured deposits and the risk of a run on the bank, The stock was also being attacked by short sellers as smart traders were keen to signs, taking the stock down from $120 per share to $34 per share.
The First Republic was saved, but in a weird way. Instead of a bailout from the Fed, the Fed was able to convince 11 other large banks to put $30 billion of their deposits into First Republic for at least 120 days.
Peter Boockvar gave a great example of how weird this type of support is: Imagine if Janet Yellen called Walmart, Costco, Target, and Amazon and encouraged them to buy stuff from another retailer, whose business has been teetering, each month to keep them alive.
While this band-aid has eased liquidity concerns for now, other questions have arisen: What happens when those banks want their deposits back? Why does no one want to buy the bank or its assets? Is there a deeper weakness in the banking sector that is just unknown for now?
The Fed has been trying to reduce their massive balance sheet they amassed through their quantitative easing bond buying efforts by doing quantitative tightening, where they are allowing $95 billion of assets to roll off their balance sheet each month. But the Fed's balance sheet has increased by roughly $300 billion over the last week alone, due to banks borrowing a record amount from the discount window and the new bank term funding program announced this week.
It's almost comical to hear that news not even a week after Janet Yellen commented on how resilient the banking sector is. The big banks appear to be in good shape, but regional banks are feeling the pinch. We do need to wait to see how much of this borrowing was truly needed vs. just in case, but it's nonetheless concerning.
This brings us to next week, when the Fed will be faced with some tough decisions at their next meeting, starting on Tuesday and ending on Wednesday with their statement and Powell's press conference.
Will the Fed follow the ECB, which did not care and hiked 50bp? We hope not—the Fed should pause and wait to see what happens, but knowing them, they may go 25bp and use their comments to couch the markets and explain that they will be pausing going forward. It's likely to be another volatile week.
Next Week
Tuesday: Existing Home Sales
Wednesday: Mortgage Apps, Fed Statement & Press Conference
Thursday: Initial Jobless Claims, New Home Sales
Friday: Durable Goods Orders
Technical Analysis
Mortgage bonds have been extremely volatile but have not made much progress over the last few trading sessions.
MBS is once again testing its 50-day moving average and the 100.758 Fibonacci ceiling.
The 10-year has moved down to 3.48% but has been unable to stay beneath its 200-day moving average. We need them to break through to the other side so we can see some continued progress in mortgage bonds. Begin the day carefully floating.