What Happened Last Week?
SVB > NFP = Supermassive Bond Rally
In a matter of 48 hours, Silicon Valley Bank has gone from being a company that we’ve never heard about or discussed to the highest profile bank failure since the Great Financial Crisis. Such developments sound like they should be good for bonds and Friday was no exception. The news certainly overshadowed the day’s jobs report although traders also looked willing to take that in stride (higher headline job creation offset by lower wage growth and higher unemployment). The net effect was the largest rally in 4 months and one of the 5 biggest rallies of the past decade–at least for Treasuries.
Source: Matthew Graham, Mortgage News Daily 3/10/23)
What’s on the Agenda for this Week?
Overview
There have been some nice pricing gains over the last two trading sessions and today is going to be no exception. But what is causing this improvement and how long can it last?
Three Things
The three areas that have the greatest ability to impact MBS backend pricing are: (1) SVB Bank, (2) Inflation Nation and (3) Central Bank Palooza.
(1) SVB Bank: The fallout from Silicon Valley Bank continues to drive money into long bonds as a flight to safety. It was the biggest factor in pricing last week. Speculation and concern over counter party fallout and that there are other similar banks may face the same issues which poses a systematic risk.
(2) Inflation Nation: There will be the last big dose of economic data that the Fed needs before their FOMC meeting next week. This week will be CPI and PPI.
(3) Central Bank Palooza: The European Central Bank will issue an important interest rate decision. They flat-out said that they would raise it 50BPS at their last meeting but will they back off their forward guidance at this meeting?
Market Wrap-up
Domestic Flavor
There were no economic events today.
The Running Man: The bond market continues to benefit from concern over the stability of the financial banking system as Silicon Valley Bank and now Signature Bank have both bit the dust, with concerns over First Republic, Pacific Western Bank and several others on the watch list. Signature Bank has had over $100B in deposits leave the bank and is now the 3rd largest bank failure in U.S. history.
On Deck For Tomorrow: Consumer Price Index (CPI).