As we are now aware, we have had three regional bank failures and a lot of nervous deposit holders. Investors are reassured by regulatory actions to limit the fallout. Specifically, that SVB depositors will be protected.

We hope the FEDs will pause and see what they have done. Let’s hope they move less aggressively raising interest rates.

From a bond perspective, we are seeing one of the largest rate improvements I have seen in the last five years. As of last Thursday, we have seen a 159bp (basis point) drop-in rates. The national average rate went from 7.126% to 6.879%.

So, what happened to Silicon Valley Bank.

How did SVB get here: During the pandemic they had a huge influx of deposits. Some of those deposits they made loans, while other funds were deposited in Securities i.e., bonds. The underlying issue was the Fed raising rates. When the rates rose, those purchased bonds lowered in value. This is not a problem unless you need to sell early.

Deposits started to leave the bank faster than they anticipated which forced SVB to sell the bonds at a reduced price and took a loss. Last Wednesday they announced they needed to raise capital the next day, and that panicked the depositors. The stock sold off and in one day 42 billion dollars was withdrawn. SVB was forced to meet draw demands. They sold $21B and forced to take a $2B loss.

How Significant is the collapse: it matters because it could panic other parts of the banking system like Signature bank and First Republic, who announced they received funds from the Federal Reserve and JP Morgan.

What could happen next: The Key thing to watch is, are the investors and depositors reassured. Time will tell.

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