Strange Days! US Mortgage Rate Falls To 6.97% As Banking Crisis Persists (Yellen, Bank Consolidations, Bailouts And The Return Of QE)

Strange days, indeed.

Despite endless promises from Washington DC that there would never be another bank bailout, the Biden Administration bailed out Silicon Valley Bank (SVB) by removing the $250,000 cap on deposit insurance. Then Treasury Secretary Janet Yellen added that in the future, only banks that posed SYSTEMIC RISK to the economy will be bailed out. Translation: only the big four Too Big To Fail (TBTF) banks will be bailed out. Meaning that the Biden Administration prefers big banks to community banks. “Middle-class Joe” loves BIG Pharma, BIG defense, BIG tech, BIG media and now BIG banks. He should rename himself “Big Joe” Biden for the 2024 Presidential election.

Of course, we are aware of The Fed’s about face on shrinking their balance sheet (green line). While Bankrate’s 30-year mortgage rate has now declined below 7% to 6.97%, it has only fallen -15 basis points since the recent peak of 7.12% on 3/2/2023 when the 10-year Treasury yield was 4.056%. So, the 10-year Treasury yield has fallen -62.7 basis points since 3/2/2023 while the 30-year mortgage rate dropped only -15 basis points.

On the European banking front, Credit Suisse is kaput and both Swiss Bank and Deutsche Bank are considering buying the assets of Credit Suisse. In other words, MORE bank consolidation.

Here is a chart of US bank consideration as of 2009 with 37 banks in 1990 shriveling to 4 mega, TBTF banks in 2009 that remain today. But will the now unprotected community and local banks be absorbed into the 4 superbanks? Time will tell, but if history is repeated, the answer is yes.

The KBW bank index continued to fall despite the bailouts of SVB and Signature Banks. But at least total returns on Treasuries and MBS that banks hold increased with the return of QE!

Yellen and Biden compete for the Knucklehead Of The Century Award. While not as sloppy as the sudden Afghanistan withdrawal, bailing out the Silicon Valley elites will not end well.

Fed Dead Redemption! Flight To Safety As US Treasury 10-Year Yield Drops -16 Basis Points And Fed Discount Window Soars (Wrong Way Yellen Strikes Again!)

Its crisis time again.

First, The Fed’s discount window soared to its highest level since … you guessed it … the previous financial crisis of 2008/2009.

Second, the 10-year Treasury yield declined -16 basis points this morning as investors flee to safety.

Bankrate’s 3-year mortgage rate rose to 7%, but with today’s decline in the 10-year Treasury yield we should see mortgage rates declining.

Yes, much of the blame belongs to The Fed’s leadership (Bernanke, Yellen, Powell) for leaving rates too low for too long, then suddenly try to lower inflation by raising rates. Now we have The Fed’s balance sheet INCREASING again as the use of The Fed’s discount window soars to highest level since Lehman Bros fiasco.

The NEW Banking Crisis In One Chart (Hint: Inflation = Fed Rate Hikes = Treasury/MBS Duration Increases = Bond Losses = Bank Runs) Bond Volatility Highest Since 2008

So, the Biden Administration made a horrible error by guaranteeing deposits at Silicon Valley Bank for deposits over $250,000. Essentially, Biden bailed out big tech that kept their deposits at SVB.

But what triggered the run on SVB and other banks? Simple. Biden and Congress spent like drunken sailors with Covid and The Federal Reserve went nuts printing money. Viola! We got inflation. But with inflation came The Fed’s attempt to get inflation back to its 2% target (difficult since Biden/Congress refuse to return spending to pre-Covid levels). But as interest rates rise, duration (weighted average life of MBS) rose dramatically meaning that risk increased. But banks like SVP ignored the risk, or didn’t hedge, or were spending time worrying about non-bank related issues.

So, what happened? Banks are holding Treasuries and MBS (orange line) that are getting clobbered with rate hikes (yellow line).

Talk about volatility. Today, the 2-year Treasury yield is up over 20 basis points as bond volatility hits levels last seen in 2008, just prior to the subprime credit crisis.

So, Biden’s bailout of SVP depositors stopped the deposit run for the moment. But if The Fed keeps hiking rates, banks are going to be hurting worse and worse. They could rebalance their portfolios and/or hedge. But with Uncle Spam (Biden) at the helm, bailouts are always on the table.

Reversal Of Fortune! Fed Expected To Hike Once By 25 BPS, Then Cut Rates By 125 BPS By End Of 2023

Market now expects FED to hike max. one more time by 25bps followed by 125bps cuts in total by end of 2023.

And bond volatility is up the most since … the last financial crisis.

No, not the Klaus von Bulow “Reversal of Fortune.” Just a Fed/Biden murder of the US economy.

US Inflation Comes In Hotter Than Expected, Real Weekly Earnings At -1.9% YoY, Negative For 23rd Consective Week (Treasury 2-year Yield Rises 34 Basis Points!)

The Federal Reserve is some hard thinking to do. Inflation came in hotter than expected, so raise rates to fight inflation or lower rates to prevent bank contagion. Similar to Kevin Malone’s “Double fudge brownies or Angela” debate.

While headline inflation (CPI) came in a 6% (considerably higher than The Fed’s 2% target), core inflation came in at 5.5% year-over-year (YoY), which was expected.

The truly nasty number is today’s inflation report is that weekly earnings YoY remained the same at a terrible -1.9%. Meaning that inflation is higher than nominal wage growth. This is the 23rd straight month of negative real weekly earnings. Well done, Fed and Biden!

Food is up 10.2% YoY. Electricity up 12.9%, shelter up 8.1%.

On the news, the US Treasury 2-year yield rose 34.3 basis points.

Somehow I doubt that Biden’s press secretary will tout 23 straight months of negative weekly earnings growth as one of Biden’s economic accomplishments.

US Financial Conditions Collapse On Fed Failures (Bank Stocks Continue To Fall Despite Biden’s Assurances)

The Fed (Bernanke, Yellen, Powell) kept rates too low for too long (their new moto?), and hell is now being paid.

US financial conditions index collapsed on the 3 bank failures … so far.

Despite what Resident Biden said about banks, bank stocks fell again today.

Gold Soars 2% On Failure Of Fed And Bank Regulators

All together now. The Fed has been printing too much money for too long and Biden restricts fossil fuel production. Ad in rampant Federal spending and we have INFLATION. Inflation led to The Fed to raise rates. And with rate increases and down go the banks.

Of course, The Fed and Biden Administration will overeact (e.g. offering deposit insurance on ALL deposits above $250,000 creating moral hazard risk). As such, we are seeing gold prices soar by 2% this AM.

In adddition to gold rising 2%, natural gas futures are up 6%

Are You Ready? Banks Postitioned For A Bail-in As Silicon Valley Bank Fails (FDIC, Fed Weigh Special Vehicle After SVB Collapses, AOC Alert!)

Are you ready?

Despite cries from Summers, Yellen and other the DC illuminati (Biden is oddly silent), US banks are NOT fine. In fact, banks in general are suffering from Fed rates increases due to holding of long-term Treasuries and MBS.

In fact, The Federal Reserve’s fight against inflation is causing serious problems, as exemplified by AOC. No, not THAT AOC. but bank Accumulated Other Comprehensive Income.

Accumulated Other Comprehensive Income (AOCI) are special gains and losses that are listed as special items in the shareholder equity section of a company’s balance sheet. The AOCI account is the designated space for unrealized profits or losses on items that are placed in the other comprehensive income category.

On the regulatory call reports, AOCI is added to regulatory capital. Since SVB’s AOCI was negative (because of its unrealized losses on AFS securities) as of Dec. 31, it lowered the company’s total equity capital. So a fair way to gauge the negative AOCI to the bank’s total equity capital would be to divide the negative AOCI by total equity capital less AOCI — effectively adding the unrealized losses back to total equity capital for the calculation.

Getting back to our list of 10 banks that raised similar red margin flags to those of SVB, here’s the same group, in the same order, showing negative AOCI as a percentage of total equity capital as of Dec. 31. We have added SVB to the bottom of the list. The data was provided by FactSet:

Or this chart of vulnerable banks from Morningstar of unrealized losses and liquidity risk.

Here is a snapshot of SVB’s balance sheet. Or UNbalanced sheet.

After Congress passed the greatly flawed Dodd-Frank banking legislation, bailouts of banks are prohibited. But bank BAIL-INs still exist. Banks use money from their unsecured creditors, including depositors and bondholders, to restructure their capital to stay afloat. Put simply, they can convert their debt into equity to increase their capital requirements. Although depositors run the risk of losing some of their deposits, banks can only use deposits in excess of the $250,000 protection provided by the Federal Deposit Insurance Corporation (FDIC).

In any case, the FDIC and Fed are weighing a special vehicle after SVB swiftly collapses. Special vehicle? Sounds an awful like the mega bank bailout of 2008 under Hank Paulson.

No, not THIS AOC!

Bank Contagion? First SVB Crashes, Now First Republic Bank (Down -28% At Open)

Ah, memories! I still remember the 2000s housing bubble and subsequent financial crisis and bank bailout from 2008/2009 like it was yesterday. And I remember Representative Barney Frank (D-MA) claiming that the Dodd-Frank legislation would end bank bailouts. I laughed out loud when I heard Mr. Frank utter those preposterous words.

Now here we are again with yet another bank contagion. First it was Silicon Valley Bank, now it is First Republic Bank (down -28% at opening).

And there is a trading halt on First Republic. But YoY growth on FRC’s earnings of -34.7% is horrendous.

At least cryptobank Silvergate isn’t down as much as Silicon Valley Bank and First Republic Bank.

And the SPDR Regional Bank index is getting clobbered as Fed withdraws stimulus.

SVB’s management’s solution appears to have been to seek out yield through a lot of long-duration bonds. The bank started to lose deposits as VCs pulled cash/burnt through operating capital.

SVB’s CEO Greg Becker saw this coming and dumped his holdings.

Where were the regulators??

Hang ‘Em High! US Treasury 10Y-2Y Yield Curve Inverts To Near Lowest Since 1981, Credit/Equity Spread Turns Positive As Fed Tightens Monetary Noose

Hang ’em high!

As inflation remains persist (thanks to endless Fed stimulus and endless Federal spending splurges), we are seeing The Federal Reserve finally withdrawing the monetary stimulus (tightening the monetary noose). And with it, the US Treasury yield curve (10Y-2Y) goes down with it.

Another sign of distress is the spread between credit and equities which has turned positive as it does in times of crisis.

UPDATE! Recession predictor the US Treasury yield curve just went “red alert”, inverting to -100 basis points.