Marketmind: Bond blows batter banks as SVB cracks

A look at the day ahead in U.S. and global markets from Mike Dolan

If you were looking for signs of stress from the brutal hit to bond markets over the past year, and the seismic repricing there again since the start of February, look no further than the sudden quake in bank stocks.

U.S. and global bank shares dived over the past 24 hours – wiping out about $100 billion in value – after west coast lender Silicon Valley Bank scrambled to reassure venture capital clients that their money was safe after a capital raise led to its stock collapsing 60%.

SVB Financial launched a $1.75 billion share sale on Wednesday to shore up its balance sheet, claiming it needed the proceeds to plug a $1.8 billion hole caused by the sale of a $21 billion loss-making bond portfolio consisting mostly of U.S. Treasuries.

The shock threw a spotlight on possible hits other banks may suffer from the renewed rout in bond prices as the U.S. Federal Reserve signals another severe tightening of credit – and the possible contagion within the banking system from balance sheet uncertainty.

While investors holding bonds to maturity can absorb bond price hits, as ‘safe’ bonds like Treasuries will pay back at par eventually, banks and leveraged investors required to mark holdings to current market prices may have to register the hit – with unnerving consequences.

SVB may be an unusual case in point – given its exposure to both last year’s attrition in the tech sector, related startups and bond markets. But it’s unlikely to be alone.

Shares of First Republic, a San Francisco-based bank, sank more than 16.5%. Zion Bancorp dropped more than 12% and the SPDR S&P regional banking ETF slid 8%.

Major U.S. banks were also hit, with Wells Fargo (NYSE:) down 6%, JPMorgan (NYSE:) down 5.4%, Bank of America (NYSE:) 6% lower and Citigroup (NYSE:) 4% lower.

With added pressure from mounting concerns about Credit Suisse – after it postponed publication of its annual report this week following a last-minute call from the U.S. Securities and Exchange Commission – European bank stocks followed U.S. peers lower. Credit Suisse stock itself was down another 4% on Friday to record lows.

In a troubling week for banks and financial tech generally, there was also trepidation about the failure of crypto lender Silvergate Capital (NYSE:), which disclosed plans to wind down and voluntarily liquidate. British subprime lender Amigo said on Friday it was struggling to secure an additional 45 million pounds ($54 million) of capital from investors – sending its shares down 30%.

The reverberations around world markets more generally saw a retreat from risk and dash for safety – not least on a critical day for assessing Fed rate risk given the release of the February employment report later.

Ironically, the dash for safety prompted a rally in bonds – in part because some think signs of financial stress may force the Fed to think again about speeding up rate hikes later this month.

Ten-year Treasury yields have recoiled almost 20 basis points from yesterday’s highs to just above 3.8% on Friday and futures pricing for peak and yearend Fed policy rates dialled back. The moves were encouraged ahead of the monthly jobs report as weekly unemployment stats on Thursday showed some tentative loosening of the U.S. labor market at last.

As Wall St stock indices retreated sharply, the of implied equity volatility staged its biggest one-day jump since June last year and world stock indices hit their lowest level in two months. U.S. stock futures were in the red again ahead of the open.

In currency markets, the dollar held steady amid the stress – slightly lower against sterling and the euro, but up against the yen after the Bank of Japan held the line on Friday in its lonely easy monetary policy stance.

The BOJ held off making changes to its controversial bond yield cap policy, leaving all options open ahead of a leadership transition in April.

Key developments that may provide direction to U.S. markets later on Friday:

* U.S. February employment report

* European Commission President Ursula von der Leyen discusses clean energy and supply chains with U.S. President Joe Biden in Washington

* European Central Bank President Christine Lagarde meets German Chancellor Olaf Scholz in Berlin

Graphic: SVB Financial’s stock slumps as investors fear bank run https://fingfx.thomsonreuters.com/gfx/mkt/zgpobnxeavd/Pasted%20image%201678405360777.png

Graphic: SVB cracks as bond blows bruise banks https://fingfx.thomsonreuters.com/gfx/mkt/jnvwyanxevw/One.PNG

Graphic: U.S. jobs market https://www.reuters.com/graphics/USA-ECONOMY/PAYROLLS/egvbyoxewpq/chart.png

Graphic: The BOJ’s YCC faces a reckoning https://www.reuters.com/graphics/JAPAN-ECONOMY/BOJ/myvmoaleevr/chart.jpg

(By Mike Dolan, editing by Christina Fincher mike.dolan@thomsonreuters.com. Twitter: @reutersMikeD)