Something finally broke, in fact a few things did. March was dominated by record deposit withdrawals after the demise of a few banks, some American and one Swiss. The gist being that 475bp of tightening in a little over a year by the US Federal Reserve had not been a common scenario for risk models. Not least ones with unhedged duration liabilities like SVB. The Fed and FDIC were quick to offer deposit protection and liquidity vehicles for banks to cash swap US treasuries at par, doing just enough to stop the bank run snowballing. However, a significant amount of bank deposits have switched to money market funds, and with record rate differentials, this seems likely to continue. In Europe, the litany of disasters befalling Credit Suisse over recent years, finally caught up with them as their CDS blew sky high on Friday 17th March and the Swiss regulator forced a shotgun marriage with UBS over the subsequent weekend. The yoyo of short end rates in G10 continues with many core macro positions being stopped out and rapid pricing of emergency cuts replacing “higher for longer”. This rates volatility has permeated through the G10 as continued mixed data supports both hard and soft landing narratives. The uncertainty about what breaks next and financial credit availability is now the worry going forward. Rollover of commercial property loans being the topic of choice.
Undoubtedly credit access will be tightening and the impact on economic growth, labour market and finally inflation is open to debate. The cycle is now very fluid with several cuts being factored in the 3rd and 4th quarters of 2023. Such an environment has shown our portfolio diversification to have been sufficiently robust, and also very attractive for rotation of risk.
Over the month the ECB and SNB hiked by 50bps, while the Norges, BoE, RBA and Fed hiked by 25bps. The BoC and BoJ were unchanged.
The US 10y closed the month 47bps lower and 5s-30s swap was 33.55bps steeper.
