Friday, Mar 10, 2023

What's going on with BTC and ETH, what's brewing in the jobs market, yesterday's hearing and more...

“It's tough to make predictions, especially about the future.” – Yogi Berra ||

Hello everyone, and happy Friday! I’m sending this earlier today because I’ll be out of pocket at the usual publish time, but that does mean it’s somewhat shorter than usual. Many of you will probably be relieved to hear that. For me, it’s a pity since there’s so much going on, but I’ll have the chance to do some catching up in tomorrow’s weekly. 😊

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MARKETS

Stuff seems to be happening fast. It’s possible that what we’re seeing in markets is just a blip, and the tension will continue to build for some time yet. Or, it could be that we’re starting to see the unravelling play out.

The 10yr2yr yield curve inversion dipped below 100bp earlier this week for the first time since 1981. I’ve written before about how the depth of the inversion is not a particularly significant recession indicator – even a mild inversion has in the past worked just fine for that. A steep inversion does spell trouble for banks, however, especially those that invest the inflows from short-term borrowing (such as deposits) in long-term assets (such as longer-term bonds). As the yield curve inverts, they have to pay more on the former, earn less on the latter, and suffer an overall reduction in the value of both as the entire yield curve rises.

Banks are indeed suffering. Beyond the liquidation of Silvergate (whose issues were arguably due to its focus on crypto-related businesses and some maturity mismatch decisions), we now also have trouble at Silicon Valley Bank. This institution is also suffering from a lack of client diversification (most of its deposits come from venture capital-backed tech companies) and over-investment in long-term securities, but it could still avoid Silvergate’s fate. What’s more, its woes are not necessarily replicated across the sector, as most banks have better client diversification and more flexible balance sheets.