Silicon Valley Bank’s rising distress and eventual collapse fueled additional credit investor concern about the broader banking sector on Friday, further weighing on the biggest Wall Street firms’ bonds.
(Bloomberg) — Silicon Valley Bank’s rising distress and eventual collapse fueled additional credit investor concern about the broader banking sector on Friday, further weighing on the biggest Wall Street firms’ bonds.
The extra yield that money managers get for buying bank bonds instead of Treasuries rose, signaling greater unease. Spreads on JPMorgan Chase & Co.’s 4.9% notes due 2033 widened by 0.08 percentage point, or 8 basis points, to 164 bps. For Goldman Sachs Group Inc.’s 3.1% notes due 2033, spreads widened 10 bps to 182 bps.
Spreads for both bonds were the widest since January, but well below October levels, signaling that investors are slightly more concerned but not yet seriously fearful. The cost of guaranteeing bonds against default using credit derivatives also climbed, with five-year credit protection on Goldman Sachs jumping about 2 bps to 94 bps, also the highest since January, up about 13 bps this week.
Silicon Valley Bank became the biggest US bank failure in more than a decade after its customer base — largely consisting of tech startups — grew worried and yanked deposits. Regulators stepped in and seized the bank, guaranteeing deposits eligible for US backing. The bank suffered big losses on Treasuries and mortgage bonds that got clobbered by the Federal Reserve’s rapid interest rate hikes, triggering concern from depositors.
“We’ll have to see how this story develops but something always breaks hard during or after a Fed hiking cycle,” said Jim Reid, a strategist at Deutsche Bank AG. “Is this another mini wobble on this front or the start of something bigger?”
In the US, a key measure of market-wide credit risk, the Markit CDX North American Investment Grade Index, reached its widest spread since late December. In Europe, the cost of high-grade credit insurance recorded its biggest intraday jump this year — albeit to levels that remain well below their recent highs in September. Spreads on a basket of European senior bank debt climbed to the widest since late January, according to data compiled by Bloomberg. Financial company shares dropped.
SVB Races to Prevent Bank Run as Funds Advise Pulling Cash
European junk-rated corporates were also impacted, with the cost of insuring bonds against default rising the most since mid-December.
“This is just the first inning,” David Knutson, head of US fixed income product Management at Schroders said in phone interview Friday. “The reality is there was surplus liquidity and business over-funded at zero costs and that is all changes. We’ve had a regime shift in costs and now these business plans are failing and their intermediaries that are levered are struggling.”
Investors are grappling with whether SVB’s troubles are an isolated case or point to a deeper industry problem. CreditSights Inc. analysts wrote that the issues at SVB are “idiosyncratic based on its business model and especially its funding profile, and are not a reflection of broader banking system issues.”
JPMorgan credit analysts also wrote in a note Friday that it may not be systemic, but it does “reflect some of the structural issues” that drove their underweight rating on regional banks.
The pressure felt across banks’ bonds and other credit indicators could test recent bullishness on the sector, which has undergone years of balance-sheet repair since the days of the global financial crisis. On Friday, the riskiness of lenders’ subordinated debt compared to safer senior notes jumped in Europe, with the former among the first in line for losses if a lender defaults.
The cost of insuring the bonds of Credit Suisse Group AG widened to its highest since December. Five-year credit default swaps for the Swiss bank jumped on Friday as much as 19 basis points, according to data compiled by Bloomberg.
–With assistance from Giulia Morpurgo, Paul Cohen, Tasos Vossos, James Crombie and Caleb Mutua.
(Recasts, updates throughout to reflect collapse of Silicon Valley Bank)
More stories like this are available on bloomberg.com
©2023 Bloomberg L.P.