Rising Interest Rates Hurt – Who Knew?

Also Interesting

• A tale of two countries
• LS China through regulatory and businessupheaval
• Alternative Approaches to Multi-Factor Index Construction: Like-for-Like Comparisons

The US authorities took out the “big guns” and acted decisively before the market open to contain the spill over effect from the demise of SVB (now accompanied by Signature Bank) using a two-pronged approach. First, they will “make good” on these banks’ deposits beyond the normal FDIC insurance limit. Second, the Fed has launched a new program ensuring access to 1-year liquidity at favourable terms: the par value, instead of the market value, will be used to assess collateral – providing relief against the shrinkage of the banks’ bond portfolio – and no “haircut” will be imposed. This should stem a potentially disruptive migration of deposits from small to mid-size banks to large, systemic ones. Beyond the immediate financial stability issue, the SVB episode sheds a light on the not-sostraightforward impact on higher interest rates on banks, especially when variable rate liabilities collide with fixedrate assets accumulated at historically low yields. This is another reason to be quite attentive to macro-financial developments as a potential harbinger of difficulties in the real economy. The SVB episode is also likely to trigger more prudence at the Fed in the field of monetary policy. In any case, there was just enough softness in the payroll data last Friday to stop the Fed from resuming “jumbo hikes”. Unless this week’s CPI comes noticeably above expectations, 25bps should remain the pace until a terminal rate which we see at 5.50% is hit in June.