The Federal Reserve has comprehensively dealt with the SVB fallout over the weekend. Led by ex-Federal Reserve chair after the financial crisis, Janet Yellen, the comprehensive set of measures has helped to ensure that doubts over systemic issues in the US banking system have been put to bed. With a speedy response to the crisis delivered, the Fed can get back to its day job of raising interest rates to deal with inflation.
Not so fast.
The markets worry and today that worry has pushed risk assets (such as non-government bonds and equities) lower in price. There remain lingering concerns, not so much around systemic banking issues, but rather which other entities have business models which are unsuited to the step change in interest rates?
Over the past six months there have been a number of high profile examples and, allowing for a broader interpretation of ‘business model’, would include: FTX crytpo exchange, Liz Truss’s government, concerns about the real estate investment trust sector (witness Blackstone’s real estate issues and the gating of REITS) and a secured default in Finland. And now SVB and its smaller brethren, Signature Bank.
With Fed Funds at 4.75%, a reduction of the Fed’s balance sheet at c.$60 billion a month, liquidity is becoming more important and risk markets are worried. In the aftermath of the SVB bailout, interest rate markets have rallied with the initial belief that this mini-crisis will delay rate rises, or possibly even stop them.
Friday’s US employment numbers do not support that view and the comprehensive nature of the bailout (all of SVB’s deposits guaranteed and generous lending facilities for other banks) is aimed at putting a line under this crisis. Nonetheless, markets are right to consider the timing of a rates trajectory that had become more bearish over the past month.
The Fed will want to consider very carefully its stance. A more dovish outlook might raise concerns that there are other problems in the system, whereas a continued hawkish stance will hasten problems in the system. It seems that the Fed’s weekend bailout is emphatic, but higher interest rates are not a friend of the weak with ‘wrong’ business models. Expect other companies to emerge from that struggle with higher rates, but don’t expect inflation-fighting central banks to be blown off course – at least not for now.
Important disclosures:
Disclosures
This material is provided by Aegon Asset Management (Aegon AM) as general information and is intended exclusively for institutional and wholesale investors, as well as professional clients (as defined by local laws and regulation) and other Aegon AM stakeholders.
This document is for informational purposes only in connection with the marketing and advertising of products and services, and is not investment research, advice or a recommendation. It shall not constitute an offer to sell or the solicitation to buy any investment nor shall any offer of products or services be made to any person in any jurisdiction where unlawful or unauthorized. Any opinions, estimates, or forecasts expressed are the current views of the author(s) at the time of publication and are subject to change without notice. The research taken into account in this document may or may not have been used for or be consistent with all Aegon AM investment strategies. References to securities, asset classes and financial markets are included for illustrative purposes only and should not be relied upon to assist or inform the making of any investment decisions. It has not been prepared in accordance with any legal requirements designed to promote the independence of investment research, and may have been acted upon by Aegon AM and Aegon AM staff for their own purposes.
The information contained in this material does not take into account any investor’s investment objectives, particular needs, or financial situation. It should not be considered a comprehensive statement on any matter and should not be relied upon as such. Nothing in this material constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate to any particular investor. Reliance upon information in this material is at the sole discretion of the recipient. Investors should consult their investment professional prior to making an investment decision. Aegon Asset Management is under no obligation, expressed or implied, to update the information contained herein. Neither Aegon Asset Management nor any of its affiliated entities are undertaking to provide impartial investment advice or give advice in a fiduciary capacity for purposes of any applicable US federal or state law or regulation. By receiving this communication, you agree with the intended purpose described above.
Past performance is not a guide to future performance. All investments contain risk and may lose value. This document contains “forward-looking statements” which are based on Aegon AM’s beliefs, as well as on a number of assumptions concerning future events, based on information currently available. These statements involve certain risks, uncertainties and assumptions which are difficult to predict. Consequently, such statements cannot be guarantees of future performance, and actual outcomes and returns may differ materially from statements set forth herein.
The following Aegon affiliates are collectively referred to herein as Aegon Asset Management: Aegon USA Investment Management, LLC (Aegon AM US), Aegon USA Realty Advisors, LLC (Aegon RA), Aegon Asset Management UK plc (Aegon AM UK), and Aegon Investment Management B.V. (Aegon AM NL). Each of these Aegon Asset Management entities is a wholly owned subsidiary of Aegon N.V. In addition, Aegon Private Fund Management (Shanghai) Co., a partially owned affiliate, may also conduct certain business activities under the Aegon Asset Management brand.
Aegon AM UK is authorised and regulated by the Financial Conduct Authority (FRN: 144267) and is additionally a registered investment adviser with the United States (US) Securities and Exchange Commission (SEC). Aegon AM US and Aegon RA are both US SEC registered investment advisers.
Aegon AM NL is registered with the Netherlands Authority for the Financial Markets as a licensed fund management company and on the basis of its fund management license is also authorized to provide individual portfolio management and advisory services in certain jurisdictions. Aegon AM NL has also entered into a participating affiliate arrangement with Aegon AM US. Aegon Private Fund Management (Shanghai) Co., Ltd is regulated by the China Securities Regulatory Commission (CSRC) and the Asset Management Association of China (AMAC) for Qualified Investors only; ©2022 Aegon Asset Management or its affiliates. All rights reserved.