Morning news: Bank rescue leaves the Fed in a fixed interest rate

A look at the day ahead in European and global markets from Wayne Cole

So U.S. authorities have bailed out the financial system, generating the biggest surge in short-term bonds in decades amid talk that the Federal Reserve might not raise interest rates at all next week given the stakes at stake.

The Asian day began with a bang when the Treasury Department and the Fed announced they would cover all depositors at SVB, not just those under the $250,000 insurance cap, although stock and bond holders would get no help.

So did depositors at New York-based Signature Bank, which closed over the weekend — marking the second- and third-largest failures in U.S. banking history.

They also announced a new acronym — the Bank Term Funding Program (BTFP) — which will lend for up to a year to any federally insured bank eligible for discount window access in exchange for eligible collateral, including government bonds and agency securities.

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Crucially, the collateral is valued at par with no haircut, meaning banks can use bonds trading below book value without having to realize losses.

This was not a blanket guarantee for uninsured depositors, but the hope is clear that it will prevent runs on other institutions.

That was enough to spark a rally in US stock futures, but bank shares were still under pressure across Asia, with Japan’s banking index down nearly 5%.

Given the strain on the US banking system, investors also wondered whether the Fed would really risk raising interest rates by an outsized 50 basis points next week.

Goldman Sachs came right out and predicted a pause, although it still predicts increases in May, June and July.

Fed funds futures duly extended an early rise to completely price the chance 50 basis points, as this time last week it was priced at 72%.

Two-year Treasury yields fell 19 basis points to 4.40%, falling as low as 4.34% at one point. That brought the drop since Thursday to an astounding 66 basis points, the biggest drop in three sessions since the Black Monday crash of 1987.

That was a move for the dollar, while lifting the euro above $1.0700 resistance to a four-week high.

The move spilled over into markets, which are now betting Australia’s central bank will pause in April, while extending the odds of a Bank of England hike.

The ECB is still expected to go 50 basis points this week, but it will at least have to acknowledge the risks to financial stability, which could make it a dovish hike.

This also promises to seriously complicate market reaction to US CPI data on Tuesday, where an upside surprise would put the Fed between a rock and a hard place.

Notably, long-dated government bond yields actually rose in Asia, perhaps signaling concern that a tight Fed would result in inflation staying higher for longer.

Key developments that could affect markets on Monday:

– Member of the ECB’s Executive Board Fabio Panetta participates in the Eurogroup meeting in Brussels

– President Joe Biden will address the banking crisis and perhaps flag proposals for tighter regulations

By Wayne Cole; Edited by Edmund Klamann

Our standards: Thomson Reuters Trust Principles.

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