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MBS Highway Daily Updates 03/20/2023

Current position: Carefully Floating

Stocks are moving higher and mortgage bonds are a bit lower to start what will likely be another volatile week, highlighted by the Fed's statement and press conference on Wednesday.

The recent banking crisis has raised a lot of questions, including "is my money safe at my bank?" We know that SVB and Signature Bank's deposits were fully insured, but does that mean that all banks will get the same treatment?

Janet Yellen spoke this weekend and essentially said that the only banks that will be fully insured are those that she, along with the Fed and FDIC, deem as posing "systemic risk". This means that Janet Yellen gets to pick and choose which banks will be bailed out, with no real clarity for smaller banks.

Without that clarity, these small banks, which do most of the small business lending and are really the engine of the US economy, could be in for some trouble. Depositors may not feel comfortable without real clarity, and you could see more consolidation or people withdrawing from small banks to go to big ones that they know will be insured. Adding to the pain for small banks is that they have to pay larger fees now to the FDIC for the insured deposits of larger banks.

Another question that has arisen is, "Weren't banks stress tested to prevent situations like this?" The Fed stress tested the banks and, in their "worse case scenario," assumed that the 10-year would be at 0.5% and 3-month Treasuries were near zero. But the scary thing is that since the beginning of last year, the Fed has been telling us that they were going to hike rates, and hike rates aggressively. And if you pull up a chart of the 3-month Treasury note and the Fed Funds rate, they trade in lockstep. Meaning there is no reason that while the Fed was telling us they would hike to 5.1% since last year, they would not change their assumptions on where the 3-month Treasury would go... of course it would move higher.

They also should have known that the 10-year would be much higher, as they stoked the flames of inflation, which the 10-year has to move higher in response to. What the Fed needs to do now is stop hiking rates, adjust their stress test, and come up with clarity for smaller banks. Maybe they raise the FDIC insured amount to $500k and insure a larger amount of payrolls so small businesses can run smoothly and feel comfortable keeping their money at smaller banks.

There was another casualty overseas: Credit Suisse was bought by UBS over the weekend for $3.2 billion, but it was valued at $8 billion not too long ago. Clearly, the contagion is spreading everywhere, and the ECB has its own problems with hiking so aggressively. The ECB, however, did not care and just hiked 50bp. Will the Fed follow suit? We hope not, but knowing them, they will likely hike 25bp and give some guidance that they will pause from here.

Leading Economic Indicators

The Leading Economic Indicators report, which measures 10 key areas of the economy, came in at -0.3% for February, the 11th month in a row of negative readings. Over the last 6 months, this index is down 3.6%. When the last 6 months declines by more than -0.4%, there is a recession likely over the next 12 months. With it at -3.6%, there is a very high likelihood we continue to see more recession like conditions.

Technical Analysis

Mortgage Bonds are trying to figure out the impact of the banking crisis and have been extremely volatile. Bonds opened up above the 100.758 Fibonacci level this morning, but have since broken back beneath it. Bonds are now trading just above their 50-day moving average.

The 10-year has been unable to convincingly break beneath the 3.43% Fibonacci level and 200-day moving average, which are tough floors. Yields are continuing to battle with these levels and have also been extremely volatile. Begin the day carefully floating.


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