Bank unrest causes largest one-day drop in short-term treasury rates
Investors believe that the economy has entered a new period of vulnerability that might stop the rise in interest rates, sparking the greatest one-day rally in short-term U.S. government bonds since 1987.
The effect from the failure of US lenders Silicon Valley Bank and Signature Bank spread throughout equities markets on Monday, causing several exchange traded funds to see severe drops for a third day.
The iShares US Regional Banks ETF (IAT), which had lost 27% of its value from its closing price before the sell-off began, was among the greatest losses. Also down by almost 20% were the SPDR S&P Regional Banking ETF (KRE), Invesco KBW Bank ETF (KBWB), and iShares S&P US Banks UCITS ETF (BNKS).
The Direxion Daily Regional Banks Bull 3x Shares (DPST) fell by more than half during the same time, making the losses for certain specialized leveraged ETFs even worse. Even though most ETFs only had little direct exposure to the failing financial institutions as of Wednesday's trade end, some investors did hold excessive stakes.
According to data from New York-based consultancy VettaFi, BlackRock Future Financial & Technology (BPAY) was the ETF most exposed to Silicon Valley Bank with a stake of 4.3%.
The iShares US Regional Banks ETF came in second with 3.2%, followed by the Invesco KBW Bank ETF with 2.9%, the SPDR S&P Regional Banking ETF with 2.4%, and the Invesco S&P 500 GARP ETF (SPGP) with 2.1%.
Using VettaFi data reveals that Grayscale Future of Finance ETF (GFOF) has the highest exposure to Signature Bank at 6.2%.
The following exposures were the largest: 3.8% at First Trust SkyBridge Crypto Industry and Digital Economy ETF (CRPT), 3.7% at BPAY, 2.3% at Capital Link Global Fintech Leaders ETF (KOIN), and 1.9% at Schwab Crypto Thematic ETF (STCE).
Meanwhile, the Federal Reserve and other U.S. authorities announced actions on Sunday night that were aimed at reducing the impact of Silicon Valley Bank's abrupt collapse on Friday. At the same time, Treasury yields, which drop as bond prices rise, began to decline throughout the Asia trading session.
As trading began in Europe, they subsequently took another dive, and when trading began in the United States, they kept falling as stock indices fluctuated.
When the contagion spread, Todd Rosenbluth, head of research at VettaFi, said that these ETFs “provided security level diversification but not industry or thematic risk mitigation.”
“ETFs provide diversification benefits but when the industry is under pressure there are limited offsets,” he added.
Peter Sleep, senior portfolio manager at Seven Investment Management, questioned the initial decision to invest in Silicon Valley Bank by a fund like the BlackRock Future Finance & Technology ETF. He said that higher-risk ETFs, such as ones that concentrate on regional banks, exposed investors to greater risks without offering them more rewards.
“Lumping banks into indices in this way is quite a high-risk approach,” Sleep added, noting that there had been 563 bank failures in the US since 2001, citing statistics from Deutsche Bank and the Federal Deposit Insurance.
According to Refinitiv statistics, the three largest stakeholders in Silicon Valley Bank as of December 31 were the fund goliaths Vanguard, State Street Global Advisors, and BlackRock, with a combined interest of 21.6%.
Rosenbluth at VettaFi said that while it was “too soon” to discern the full knock-on effects of the banking collapses and subsequent market sell-off, “investors are more likely to shift toward higher-quality equity investments where there is greater confidence in the cash flow and balance sheet strength of the companies inside an ETF, rather than companies with greater leverage and less certain prospects in industries like fintech and biotech.”