Bank Turmoil Continues Causing More Fed Lending

Key Takeaways

• Interest Rate Outlook Continues To Fluctuate
• Banking Sector Woes Spread To Deutsche Bank
• Volatility Creeping Higher

Spring officially started this week and flowers like Lily of the Valley will soon bloom; however, winter blues in the banking sector continue to cast a shadow. Markets closed relatively flat on Thursday, but that doesn’t tell the full story. The S&P 500 had traded nearly 70 points higher in the day before giving up those gains and closing just under 12 points higher. The Nasdaq Composite had also been up nearly 300 points before finally settling just 1% higher. Based on research done by tastylive, reversals like we saw yesterday in the S&P 500 only happen about 10 – 15% of the time, which gives you a sense of the type of market we’re currently experiencing given fears in the banking sector.

On Wednesday, the Fed announced a 0.25% interest rate increase, largely in line with where expectations finally settled after having fluctuated substantially in the past couple weeks. In his comments following the rate announcement, Jerome Powell acknowledged the current banking crisis may have a tightening effect on credit, creating a sort of synthetic interest rate increase. Following those comments, markets recalibrated expectations for future rate decisions. As of now, expectations are for the Fed to leave rates alone when they meet in May and then cut rates in June.

Keep in mind, the further out in time we go, the less reliable interest rate forecasts become. However, we have seen a sharp drop in interest rates this week. Yields on the 10-year note, after peaking at nearly 4.1% at the beginning of March, settled at 3.4% on Thursday. The 2-year yield has seen a significant drop from its high of nearly 5% earlier this month to 3.84% as of yesterday’s close.

The drop in rates comes as the Fed balance sheet, a measure of how much money is being lent out, continues increasing. In recent weeks, the Fed created what is called the Bank Term Lending Program. This program was put in place to provide emergency liquidity. That’s caused the Fed’s balance sheet to expand by $94 billion this week, following an increase of $300 billion last week.

Meantime, as fears in the banking sector continue to spread, today being Deutsche Bank’s turn, volatility has been creeping higher. On Thursday, the VIX settled at 22.61 and in early trading is just under 25. At the beginning of last week, VIX briefly broke above 30 before pulling back substantially. However, the slow move higher in recent days is something worth watching as it shows investors continue to be concerned about the overall market.

For today, banks are under pressure premarket. The S&P Regional Banking Index continues to weaken, having fallen 30% this month alone. Shares of First Republic Banks are 4% lower early while Deutsche Bank is trading 7% lower after being down 14% in premarket. Like I’ve said before, I don’t expect this banking crisis to disappear overnight and I continue to closely monitor the situation. As always, I would stick with your investing plan and long term objectives.

tastytrade, Inc. commentary for educational purposes only.