(Updates prices)
By Amanda Cooper, Yoruk Bahceli and Naomi Rovnick
LONDON, March 13 (Reuters) - Financial market stress
indicators reacted sharply on Monday after the failure of three
U.S. banks within five days, which prompted a rethink among
investors on the outlook for U.S. rates and triggered the
biggest rush into bonds since at least 2008.
State regulators closed New York-based Signature Bank on Sunday, two days after California authorities
shuttered Silicon Valley Bank , a lender that focused
predominantly on start-ups. Crypto-focused bank Silvergate said
last week it would also have to wind down its operations.
SVB is the largest bank to fail since the 2008 financial
crisis last week, sending shockwaves across global markets.
U.S. regulators stepped in over the weekend to guarantee the
deposits of SVB, but this did little to reassure investors that
there will be no more fallout.
Investors reeled in their expectations for global central
bank rate hikes, and bank stocks tumbled once again.
The cost of insuring exposure to European junk bonds soared
to two-month highs , while various gauges of equity and bond market volatility shot to their highest
since October and even gold hit a six-week peak. "I would define the moves we're having today as an
old-fashioned flight to quality, this is what normally happens
in times of stress. Credit spreads widen, equity markets come
off and safe havens provide capital appreciation," Juan
Valenzuela, a bond fund manager at Artemis, said.
In the money markets, a closely watched indicator of credit
risk in the U.S. banking system edged up on Monday, as did other
indicators of credit risk in the euro zone.
The so-called FRA-OIS spread , which measures
the gap between the U.S. three-month forward rate agreement and
the overnight index swap rate, edged to its widest since Feb.
21, to 11.4 basis points. This spread is widely seen as a proxy
for banking sector risk and a higher reading reflects rising
interbank lending risk.
"It'd be unrealistic to think that banks aren't being more
discerning about who they're going to lend money to," said Lyn
Graham-Taylor, senior rates strategist at Rabobank.
U.S. banking stocks came under fire in early
trading. An index of major bank shares dropped by as much as
8.7%, in one of the largest one-day falls since the onset of the
COVID-19 crisis in March 2020.
“If banks start to be more cautious and credit standards
tighten a lot more, that drives more risk of recession down the
road," Frederik Ducrozet, head of macroeconomic research at
Pictet Wealth Management, said.
"The more immediate risk is from the U.S., but in both
(regions) we have quarterly surveys that show banks are already
planning to tighten credit standards. Now we have more risk that
this tightening becomes disorderly at some point," he said.
European banks were heading for their largest
one-day slide in a year as well, down over 5%.
Euro swap spreads, another risk gauge, widened sharply.
The gap between two-year euro swap rates and two-year German
bond yields widened by around 20 basis
points to 83 basis points, to the highest since Nov. 11.
Analysts said that was a result of strong demand for
safe-haven bonds.
A swap spread measures the premium on the fixed-leg of an
interest rate swap, used by investors to hedge against rates
risk, relative to bond yields.
In Germany, two-year bond yields were last down over 40
basis points, much more than a drop of 24 basis points on swap
rates.
Cross-currency basis swaps, a measure of non-U.S. investor
demand for the dollar, another safe-haven, reached their widest
in three years.
Three-month euro swaps reached minus 65 bps, the most since
March 2020. Back in late 2008, when failed
investment bank Lehman Brothers collapsed, this swap rate went
as negative as 300 bps.
As dramatic as some of the moves in bond and stock prices
were on Monday, analysts agreed that it was unlikely to be a
function of direct contagion from SVB, but rather, more driven
by sentiment.
"This move we're seeing right now is more of a stress
indication than anything else," Piet Christiansen, chief analyst
at Danske Bank, said.
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Seismic shift in Fed expectations Signs of stress Moving higher ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^>
(Additional reporting by Naomi Rovnick; Editing by Hugh Lawson
and Sharon Singleton)
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