The market expects lower interest rate hikes in the US after the banking problems. Interest rate strategists believe that the US central bank’s “golden card” will prevent the crisis from spreading to the rest of the banking system.
Interest rate expert Lars Molland at Nordea says that it is not entirely clear about the situation in the interest rate market.
- In the market, interest rates on US government debt have dropped dramatically after the failure of several banks in the US.
- Since Wednesday last week, the interest rate has been holding steady Government bondsGovernment bondsInterest-bearing securities issued by the government. With a maturity of two years, it fell from more than five percent to 4.4 percent.
- At the same time, the dollar is weakening and the market is expecting a lower interest rate hike from the US central bank, the Federal Reserve.
– The fear is that you have a new Lehman situation like 2008. It helps shape prices in the interest rate market, says Molland.
He notes that the market now expects the main US interest rate to peak at around five percent, down from around 5.6 percent before the banking troubles began.
Economists at Handelsbanken note in a morning report that the bank’s collapse cast doubt on the central bank’s interest rate plans. Goldman Sachs flagship bank believes the central bank will drop the expected rate hike next week.
“The market is not quite ‘there’, but there has been a massive drop in US interest rate expectations,” Marius Gönsholt Hof, chief economist at Handelsbanken, wrote in the report.
Bank collapse in Silicon Valley: – You don’t have to worry about Norwegian savings
Silicon Valley Bank (SVB) was shut down by US authorities ahead of the weekend, becoming the biggest bank to fail since the 2008 financial crisis.
Late Sunday evening, the US authorities decided to close the New York-based Signature Bank. At the same time, the authorities have implemented measures to maintain confidence in the banking system.
It “seems reasonable that they would proceed more cautiously, at least initially,” Moland says.
– But the fundamental problem in the US economy remains: inflation is too high and the job market is tight, says Molland.
– Then the question is whether what is happening to the banks is sufficient to properly destabilize the situation. He says it is a bit early to draw conclusions on that.
Moland notes that the decline in interest rates in the US market is also affecting interest rates in Europe and Norway.
I think the “Golden Card” prevents the spread
The situation in the US, Molland says, is in part a “systemic problem”. It highlights the problem a Silicon Valley bank faced when the bank was forced to sell interest-bearing securities at a loss to cover customers’ withdrawals of deposits.
– That’s why this bank has gone through the roof, says Molland.
He says many US banks have the same problem in that they have bought bonds that are now worth much less than when they were bought.
Bonds are interest-bearing securities that decrease in value when interest rates rise. The US central bank sharply raised its key interest rate to combat soaring inflation.
This caused the value of the bonds to drop.
– But they have about the same dynamics on the deposit side as a Silicon Valley bank, Molland says.
HSBC has acquired the UK arm of Silicon Valley Bank
It also notes that the US central bank has come up with a “bank gold card,” an urgent measure that allows banks to exchange their bonds for cash for a year.
– They are not obliged to incur losses now. You should stop this, but it clearly could do something for confidence in the entire banking system.
It is possible that banks have become more cautious in lending. In this sense, it may still affect the US economy. That part is still not clear, Molland says.
He says he doesn’t think the situation will deteriorate into a banking crisis like it did in 2008, in part because the central bank has much better tools this time around.
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