Bank ETFs fall amid concerns over SVB and ‘crack’ in financial system after rate hikes

“All eyes are on financials and what’s been happening with the crack that is finally happening in the financial system due to rising rates,” said Diane Jaffee, lead portfolio manager for the relative value group at TCW, in a phone interview Friday. “It does end up going back to the Fed,” she said.

Shares of Silicon Valley Bank parent SVB Financial Group
SIVB,
-60.41%
plunged Thursday, after the Santa Clara, Calif.-based financial-services company disclosed large losses from securities sales and a stock offering meant to provide a boost to its balance sheet.

“Contagion fears began to grip the market with the financial sector leading the broader market sharply lower,” wrote analysts at Sevens Report Research, while also noting that problems at SVB appeared linked to its “target client base” rather than “any broader issue impacting larger, more diversified banks.”

California regulators closed the bank on Friday, with the Federal Deposit Insurance Corp. named as receiver.

See: Treasury monitoring a few banks ‘very carefully’ amid Silicon Valley Bank’s woes, Yellen says

In Jaffee’s view, the problem seen at SVB, which lends to the technology sector, is tied to the Federal Reserve’s rapid pace of interest rate hikes. The central bank’s monetary tightening works with a lag and “it’s now starting to bite,” she said. 

The Fed has been aggressively raising rates to bring down high inflation. That’s led to a jump in Treasury yields, with investors now seeing short-term Treasury bills as an attractive place to get higher rates versus their bank accounts, according to Jaffee.

The yield on the six-month Treasury bill
TMUBMUSD06M,
5.086%
was trading around 5.1% early afternoon Friday, FactSet data show, at last check. 

Tom Graff, head of investments at Facet, said in emailed comments Friday that “there is no real evidence of major credit problems at banks generally.” He said that “even at SVB, the problem has not been loan losses but rather deposit outflows and rising interest rates.” 

So far this week, shares of the SPDR S&P Regional Banking ETF have plunged 16.8% while the Invesco KBW Bank ETF has slumped 15.6% and the SPDR S&P Bank ETF has sunk 14.8%, according to FactSet data, at last check.

Meanwhile, the U.S. stock market was down in early afternoon trading Friday, with the Dow Jones Industrial Average
DJIA,
-1.07%
falling 0.4%, the S&P 500
SPX,
-1.45%
dropping 0.7% and the technology-heavy Nasdaq Composite
COMP,
-1.76%
slumping 0.9%, according to FactSet data, at last check.