Equities surged on reports, which later proved to be correct, that major banks are in talks to bolster First Republic Bank. Short dated Treasuries fell in price after the European Central Bank (ECB) increased its overnight rate by 50 bps, anticipating that the US Federal Reserve will do the same.
Short dated Treasuries also sold off on the possible $30 billion deposit infusion into First Republic Bank, a headline that caused shares of this embattled financial to reverse a 36% plunge and surge 12% higher from the previous day.
The First Republic news comes after an overnight lifeline from Swiss regulators that stabilized Credit Suisse, easing worries that the European lender would lead to a cascading crisis in that region. Credit Suisse’s issue are considerably different than Frist Republic’s and are regarded as company specific, not endemic to the rest of the European banking system.
Most believe the issues in the US banking system is industry/sector specific, defined as companies that have an outsized exposure to the technology industry. It is a liability issue (deposits) not an asset issue (loans); this is a major change from the banking crisis of the last 75 years.
Will the actions taken to ensure the survivability of Credit Suisse and First Republic resurrect the moribund bond market? The illiquidity is frightening. Bloomberg writes
The primary market for corporate bonds in the US is effectively closed. There is tumbleweed blowing across the new issue screens. There have been no benchmark-sized bonds priced since HSBC and Cemex on Thursday of last week. The only active issuers are federal agencies like the Federal Home Loan Banks.
The Federal Reserve will be anxious to see it reopen again. The secondary bank-bond market is dysfunctional and the primary market is dead. That has to worry an organization charged with promoting the stability of the financial system.
During the past 12 months, many market participants only discovered [or rediscovered] the bond market/interest rates are the primary determinate of equity valuations. The bond market dictates equity direction not vice versa.
What will happen today?
Last night the foreign markets were up. London was up 0.50%, Paris up 0.06% and Frankfurt up 0.37%. China was up 0.73%, Japan up 1.20% and Hang Seng up 1.64%.
Futures are flat, capping a tumultuous week. The 10-year is up 17/32 to yield 3.52%. The two year has rallied about 10 bps to yield 4.12%.
