US Banking System Under Pressure

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Bond yields plunge, volatility soars as odds of Fed pause climb

Turmoil in the banking sector and a potential premature pause to the Federal Reserve's rate hike plans have upended the government bond market, causing yields to plummet and volatility to surge to the highest levels in nearly 15 years.

The benchmark 10-year U.S. Treasury yield closed at 3.51% on March 15 from 4.08% on March 2. The 2-year yield, which closely tracks Fed rate expectations, settled at 3.93% on March 15, a 112-basis-point decline in one week. The 2-year yield closed at 5.05% on March 8 after Fed Chairman Jerome Powell indicated that the central bank may accelerate its push to hike rates if inflation and jobs data continued to come in hot.

[bhaigan]

Liquidity, deposit concentration among regulatory targets after bank failures

Regulators already have the tools they need to prevent the kind of turmoil that rocked the banking industry following a string of closures, but they must improve their supervision, according to several industry experts.

After facing various headwinds like liquidity challenges and deposit runs, regulators recently closed SVB Financial Group's bank unit, Silicon Valley Bank, and Signature Bank. Those moves came just a few days after Silvergate Bank announced that it would liquidate itself. The Silicon Valley Bank and Signature Bank shutdowns rank as the second and third largest bank failures in U.S. history, respectively.

In light of those failures, new questions are being asked about regulatory oversight of banks' liquidity and deposit mixes.

[bhaigan]

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