Market stress indicators give warning signs after the SVB crash

LONDON, March 13 (Reuters) – Indicators of financial market tensions began to signal a potential deterioration on Monday after the collapse of Silicon Valley Bank forced investors to rethink the outlook for US interest rates and sparked the largest bond round since at least 2008.

The SVB bankruptcy – the most high-profile in the banking sector since 2008 – has raised concerns about whether small business customers will be able to pay back their employees, as the FDIC insures deposits of up to $250,000.

US authorities took a series of extraordinary steps on Sunday to bolster confidence in the banking system after SVB’s bankruptcy threatened a wider financial crisis.

Investors revised their expectations for rate hikes and bank shares fell again.

The closely monitored credit risk index of the US banking system rose on Monday in the money markets, as did other credit risk indicators in the euro area.

The so-called FRA-OIS spread , which measures the difference between a three-month U.S. forward rate contract and the overnight index swap rate, rose to its highest level since February 21 at 11.4 basis points. This spread is widely regarded as an approximation of banking sector risk, with higher values ​​reflecting the increased risk of interbank lending.

“It would be unrealistic to think that banks haven’t become more selective about who they’re going to lend money to,” said Rabobank’s Lyn Graham-Taylor.

“The situation in the US is relatively local, but of course there will be tensions in the banking system as people look at their business models and wonder if anyone is in trouble,” Graham-Taylor said.

The US banking index fell 8.3%, its largest daily drop since the beginning of the coronavirus crisis in March 2020.

European banks may also have their worst day of the year, down nearly 10%.

Germany’s two-year bond yields fell more than 50 basis points, much more than swap rates, which fell by 37 basis points.

The cross-currency basis swap, a measure of non-US investor demand for the dollar, hit a nearly five-month high.

Three-month euro swaps fell to minus 34 basis points, the highest since late October.

However sharp some of Monday’s moves in bond and equity prices were, analysts agreed they were unlikely to be driven by a chain reaction after the collapse of the SVB, but rather driven by emotion.

“More than anything else, the movement we’re seeing at the moment is indicative of stress,” said Pete Christiansen of Danske Bank.

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(Amanda Cooper and Yoruk Bahceli, starring Naomi Rovnik)