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“The fundamentals of America’s economy are strong.” – John McCain 4/17/08
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Phrases like the seven words above never seem to be made when markets and the economy are running smoothly, and we’ve heard a number of similar phrases like this made by officials over the weekend and this morning. That’s definitely not to say that the events of the last week and today are a repeat of 2008, but these types of comments almost never have their intended purpose of providing comfort to investors.
What’s happened over the weekend has been notable and will have both intended and unintended ramifications down the line. With deposits at US banks having essentially been backstopped by the actions of the Federal Government, one could argue that the banking system has been de facto nationalized, and the consequences of that are completely unknown, so we won’t even begin to speculate.
The flight to safety has been incredibly pronounced in the Treasury market as the 2-year yield is down nearly 50 basis points (bps) this morning after falling 29 bps on Friday and 20 bps Thursday. What’s truly remarkable about these declines is that they came just after the 2-year yield topped 5% for the first time since June 2007. Going all the way back to 1977, the last time the 2-year yield dropped more than this in a three-day span was just after the 1987 crash, and then before that, it happened in multiple periods from late 1979 through early 1983.
Finally, despite little direct connection between what’s going on with SVB and other US regional banks, European bank stocks have also seen sharp declines in the last two days as the STOXX 600 Bank Index is down over 9%. Analysts are out defending the banks as having ‘limited risk’. That may be true with regards to SVB and other regional US banks specifically, but European banks aren’t immune to the overall trend impacting US banks (a rapid surge in interest rates shortly after central bank officials were assuring markets that any increase in rates would be gradual).
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