# Market stress indicators react sharply after U.S. bank failures
Author:  Pal Sinha, Barnali 
Author URL: https://financedigest.com/author/pal-sinha-barnali
Published: 2023-03-13
Category: FINANCE
Category URL: https://financedigest.com/category/finance
Meta Title: Market Stress Indicators React Sharply After U.S. Bank
Meta Description: Investors rethink U.S. rate outlook as market stress surges. Global markets shaken as central bank hikes questioned. Bank stocks tumble, bonds rush in.
URL: https://financedigest.com/market-stress-indicators-react-sharply-after-u-s-bank-failureshtml

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By Amanda Cooper, Yoruk Bahceli and Naomi Rovnick

LONDON (Reuters) – Financial market stress indicators reacted sharply on Monday after the failure of three U.S. [banks within five days](https://www.financedigest.com/groundhog-day-banks-continue-to-fall-into-the-traps-of-the-past.html "Groundhog Day: banks continue to fall into the traps of the past"), which prompted a rethink among investors on the outlook for U.S. rates and triggered the [biggest rush into bonds since](https://www.financedigest.com/dollar-retreats-headed-for-biggest-weekly-loss-since-mid-january-bitcoin-down.html "Dollar retreats, headed for biggest weekly loss since mid-January; bitcoin down") at least 2008.

State [regulators closed New York-based Signature Bank](https://www.financedigest.com/exclusive-u-s-regulator-seeks-sale-of-silicon-valley-bank-signature-bank-portfolios-sources.html "Exclusive-U.S. regulator seeks sale of Silicon Valley Bank, Signature Bank portfolios-sources") on Sunday, two days after California authorities shuttered Silicon Valley Bank, a lender that focused predominantly on start-ups. Crypto-focused [bank Silvergate said last week it would also have to wind down its operations](https://www.financedigest.com/is-this-the-start-of-the-race-to-redefine-the-banking-operating-model.html "Is this the start of the race to redefine the banking operating model?").

SVB is the largest [bank to fail since the 2008 financial crisis](https://www.financedigest.com/how-the-2023-banking-crisis-unfolded.html "How the 2023 banking crisis unfolded") last week, sending shockwaves across global markets.

U.S. [regulators stepped in over the weekend to guarantee the deposits of SVB](https://www.financedigest.com/swiss-regulator-monitoring-banks-and-insurers-after-svb-collapse.html "Swiss regulator monitoring banks and insurers after SVB collapse"), but this did little to reassure investors that there will be no more fallout.

Investors reeled in their expectations for global central [bank rate hikes, and bank stocks](https://www.financedigest.com/asian-stocks-rally-as-bank-jitters-calm-alibaba-lifts-mood.html "Asian stocks rally as bank jitters calm, Alibaba lifts mood") tumbled once again.

The [cost of insuring exposure to European junk bonds soared](https://www.financedigest.com/amazon-other-retailers-revamp-free-shipping-as-costs-soar.html "Amazon, other retailers revamp ‘free’ shipping as costs soar") to two-month highs, while various gauges of equity and bond market volatility shot to their highest since October and even gold hit a six-week peak.

I would define the [moves we’re having today](https://www.financedigest.com/planning-to-move-to-the-low-carbon-economy-how-banks-can-plan-today-for-new-stress-tests-arriving-soon-2.html "Planning to move to the low carbon economy: How Banks can plan today for new stress tests arriving soon") as an old-fashioned flight to quality, this is what normally happens in times of stress. Credit spreads widen, [equity markets](https://www.financedigest.com/deutsche-bank-equity-bear-market-rally-will-stretch-into-2023-dollar-weaker.html "Deutsche Bank: Equity bear market rally will stretch into 2023, dollar weaker") come off and safe havens provide capital appreciation,” Juan Valenzuela, a bond fund manager at Artemis, said.

(Graphic: Moving higher – https://www.reuters.com/graphics/MARKETS-VOLATILITY/myvmoaeqyvr/chart.png)

![Bond market volatility has outplaced that of stocks in the last month](https://www.globalbankingandfinance.com/wp-content/uploads/2023/03/234.jpg)

In the [money markets](https://www.financedigest.com/explainer-why-european-money-market-funds-inflows-are-lagging-behind-the-u-s-torrent.html "Explainer-Why European money market funds inflows are lagging behind the U.S. torrent?"), a closely watched indicator of credit risk in the U.S. banking system edged up on Monday, as did other indicators of credit risk in the [euro zone](https://www.financedigest.com/euro-zone-economic-sentiment-rises-in-january-to-seven-month-high.html "Euro zone economic sentiment rises in January to seven-month high").

The so-called FRA-OIS spread, which measures the gap between the U.S. three-month forward rate agreement and the overnight [index](https://www.financedigest.com/wall-st-indexes-mixed-treasury-yields-tick-up-as-higher-rates-loom.html "Wall St indexes mixed, Treasury yields tick up as higher rates loom") swap rate, edged to its widest since Feb. 21, to 11.4 basis points. This spread is widely seen as a proxy for [banking sector](https://www.financedigest.com/improving-reputation-in-the-banking-sector-through-marketing-communications.html "IMPROVING REPUTATION IN THE BANKING SECTOR THROUGH MARKETING COMMUNICATIONS") risk and a higher reading reflects rising interbank lending risk.

It’d be unrealistic to think that [banks aren’t being more discerning about who they’re going to lend money](https://www.financedigest.com/marketmind-banks-are-leaking-money.html "Marketmind: Banks are leaking money") to,” said Lyn Graham-Taylor, senior rates strategist at Rabobank.

U.S. [banking stocks came under fire](https://www.financedigest.com/big-ecb-hike-adds-fuel-to-the-banking-sector-fire.html "Big ECB hike adds fuel to the banking sector fire") in early trading. An index of major bank shares dropped by as much as 8.7%, in one of the [largest one-day falls since](https://www.financedigest.com/first-quarter-dash-for-cash-largest-since-early-2020-bofa.html "First quarter ‘dash for cash’ largest since early 2020 -BofA") the onset of the COVID-19 crisis in March 2020.

If banks start to be more cautious and credit standards tighten a lot more, that drives more risk of recession down the road,” Frederik Ducrozet, head of macroeconomic research at Pictet [Wealth Management](https://www.financedigest.com/wealth-management-consultant.html "Wealth management consultant"), said.

“The more immediate risk is from the U.S., but in both (regions) we have quarterly surveys that show [banks are already planning to tighten credit](https://www.financedigest.com/credit-agricole-launches-china-ma-and-investment-banking-business.html "Credit Agricole launches China M&A and investment banking business") standards. Now we have more [risk that this tightening becomes disorderly at some point,”](https://www.financedigest.com/france-seeks-strategy-as-nuclear-waste-site-risks-saturation-point.html "France seeks strategy as nuclear waste site risks saturation point") he said.

[European banks](https://www.financedigest.com/dollar-outshines-euro-sterling-amid-european-bank-jitters.html "Dollar outshines euro, sterling amid European bank jitters") were heading for their largest one-day slide in a year as well, down over 5%.

Euro swap spreads, another risk gauge, widened sharply.

The gap between two-year euro swap [rates and two-year German](https://www.financedigest.com/german-inflation-rate-to-ease-over-course-of-2023-econ-minister.html "German inflation rate to ease over course of 2023 – econ minister") bond yields widened by around 20 basis points to 83 basis points, to the highest since Nov. 11.

Analysts said that was a result of strong demand for safe-haven bonds.

A swap spread measures the premium on the fixed-leg of an interest rate swap, used by [investors to hedge against rates](https://www.financedigest.com/uk-stocks-slip-as-rate-hike-worries-grip-investors.html "UK stocks slip as rate hike worries grip investors") risk, relative to bond yields.

(Graphic: [Signs of stress](https://www.financedigest.com/4-reasons-your-finance-employees-are-showing-signs-of-stress.html "4 reasons your finance employees are showing signs of stress") – https://www.reuters.com/graphics/MARKETS-SWAPS/gkplwlrmxvb/chart.png)

![Signs of stress](https://www.globalbankingandfinance.com/wp-content/uploads/2023/03/233.jpg)

In Germany, two-year [bond yields](https://www.financedigest.com/stocks-fall-bond-yields-rise-as-focus-shifts-to-fed-rate-outlook.html "Stocks fall, bond yields rise as focus shifts to Fed, rate outlook") were last down over 40 basis points, much more than a drop of 24 basis points on swap rates.

Cross-currency basis swaps, a measure of non-U.S. [investor demand for the dollar](https://www.financedigest.com/dollar-tentative-as-investors-assess-rate-hike-path.html "Dollar tentative as investors assess rate-hike path"), another safe-haven, reached their widest in three years.

Three-month euro swaps reached minus 65 bps, the most since March 2020. Back in late 2008, when failed [investment bank](https://www.financedigest.com/hsbc-appoints-new-markets-head-amid-wider-investment-bank-reshuffle.html "HSBC appoints new markets head amid wider investment bank reshuffle") Lehman Brothers collapsed, this swap rate went as negative as 300 bps.

As dramatic as some of the [moves in bond and stock](https://www.financedigest.com/stock-pickers-reckon-its-time-to-move-on-from-central-banks.html "Stock pickers reckon it’s time to move on from central banks") prices were on Monday, analysts agreed that it was unlikely to be a function of direct contagion from SVB, but rather, more driven by sentiment.

This [move we’re seeing right now is more of a stress](https://www.financedigest.com/10-tips-to-overcome-the-stress-of-moving-office.html "10 Tips to Overcome the Stress of Moving Office") indication than anything else,” Piet Christiansen, chief analyst at Danske Bank, said.

(Graphic: Seismic shift in [Fed expectations](https://www.financedigest.com/dollar-set-for-weekly-loss-amid-expectations-fed-will-slow-hikes.html "Dollar set for weekly loss amid expectations Fed will slow hikes") – https://www.reuters.com/graphics/MARKETS-FUTURES/egpbyorzdvq/chart.png)

![Seismic shift in Fed expectations](https://www.globalbankingandfinance.com/wp-content/uploads/2023/03/232.jpg)

(Additional reporting by Naomi Rovnick; Editing by Hugh Lawson and Sharon Singleton)


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