MBS down 53 bps on the day. Stocks up about 25 points.

Bonds were much weaker overnight with no new news on the banking contagion front. Stronger data in Germany and zero usage of the ECB’s bank swap facility only made matters worse, but the centerpiece of domestic attention was a 2am ET announcement that First Citizens bank would acquire the loans, branches, and deposits of Silicon Valley Bank.

First Citizens bank will acquire nearly $130bn in deposits and loans. In addition, there was no new drama in the European banking sector overnight.  Value works out to roughly an 18% discount.

One of the big things that sunk Silicon Valley Bank was the reporting on its “unrealized losses”.   Barry Habib pointed out today that The Fed has $2.6T of mortgage backed securities – at much lower rates.  Their unrealized loss is about $500B.   They are also now losing money for the first time in history.  Losing about $7B per month.

Volatility remains highly elevated at more than two standard deviations above its trailing five-year average, with Fed fund futures pointing to a resumption of rate cuts by July and St. Louis Fed president Bullard promoting rates by year-end to be even higher than now. The average Fed policymaker’s year-end Fed funds target is at 5.1%, investors foresee three cuts by then.

First Republic is rallying this morning on news that regulators are considering an additional lending facility. Deposit outflows eased last week, as the top 25 banks gained about $120 billion in deposits, while 850 smaller banks lost $108 billion.

Deposit outflows eased last week, as the top 25 banks gained about $120 billion in deposits, while 850 smaller banks lost $108 billion.

Over the weekend, Minneapolis Fed President Neel Kashkari said that the chances of a recession have increased due to the turmoil in the banking sector.

Lackluster 2yr Auction, But MBS Losses Aren’t What They Seem.

MBS dropped right at the same time, but the weakness is best classified as incidental because it’s only buyers who have dropped their bid prices.  Sellers are not yet chasing the bid to lower levels (aka, classic illiquidity).

Bank health continues to dominate the news cycle with investors buying bonds when things look shaky and selling when days go by without new drama.  In addition to the ticking clock, reassuring headlines can also take a toll on bonds.  That happened overnight as First Citizens bank assumed over $100 bln in deposits and loans from SVB. A rally in EU equities (led by banks) added to the risk-on sentiment.  Domestic hours saw bonds drift sideways to slightly weaker with MBS losing more than 5/8ths and 10yr yields up 16.5bps at 3.535.