I feel pretty confident in making this call, and I don’t make market calls very often: We have seen the top for 2-year Treasury yields. It’s not going any higher than it’s been because there’s no reason for it to. Financial conditions are now contracting hard due in part to the events of this week but also because monetary policy operates on a lag – and the first Fed Funds hike of the cycle took place in March 2022, exactly a year ago.
If you want to fight inflation, one sure way to do it would be a full-blown panic in the financial system and a synchronized mass-failure of regional banks from coast to coast. Probably not going to have to worry about the price of gym memberships and Porsche leases in that environment. Is this the Fed’s plan? I don’t think so. I’m pretty confident we’ve seen the end of the hiking cycle. March meeting could be a small hike or no hike. Remember that every hike pushes the bond losses on banks’ balance sheets even deeper into the red. You would not, as a regulator, continue inflicting these losses while simultaneously sitting in meetings about rescues and resolutions.
They’re not going to hike rates and rescue banks simultaneously, are they? Because that would be pretty dumb.
By the way, SVB’s failure is not a regulation story – they blew up with 10-year Treasurys on their books. It’s a story of what happens when the central bank blows a decade-long bubble in venture-backed startups culminating in the crypto-SPAC free-for-all orgy of 2021 – and then you try to reverse it all within a single calendar year with five hundred basis points of consecutive rate hikes. The biggest beneficiaries of zero-percent interest rates were tech founders and the bankers who loved them – Silicon Valley Bank as the epicenter of the whole thing. When rates began to rise and the IPO spigot began to close, the failure got underway. It took two years for the lack of deposits and burgeoning bond losses to weaken the bank – and then a single 24 hours in which $42 billion was withdrawn in the first-ever Twitter-inspired, mobile-app enabled digital bank run. During the Savings & Loan Crisis of the 1980’s, people had to physically show up to a branch to pull their deposits. Now you can do it by phone, from your bed, your bath or your beyond. This is some new shit nobody was ready for.
Anyway, want to see it repeated at another two or three hundred banks this spring? Keep hiking rates. I don’t think they will. Top is in.