Inside Markets

A week-long back up in 5-year Treasury yields stalls out at moving average price support near 3.80%. The decline in 5-year yields looks like it will resume with a near-term target of 3.30%.

In addition to the Fed decision, markets will pay close attention to Powell’s press conference for: 1) near-term direction on efforts to contain financial contagion; 2) associated impact on financial conditions from expected tightening of bank lending standards.

The debate over whether the Fed hikes by 25bp or decides to pause at tomorrow’s meeting seems less important when you consider that an estimated $440B of its BTFP facility has already been utilized.

A de facto end of the tightening cycle has driven bond yields and kicked off equity rotation into growth sectors and Tech in particular.

Rotation into growth from value sectors began late last week after 10-year real yields reversed from strong technical resistance at +170bp.

Bond market volatility has spilled into equity markets and other cross markets amid low liquidity conditions. Implied equity volatility as measured by the VIX Index is pressing toward levels from last September.

Silicon Valley Bank’s failure highlights the pressure of rising funding costs. The Fed backstop on deposits at SIVB and SBNY reduces the likelihood of more regional bank failures, but the pressure on a banks underlying business model remains acute.

The Fed’s decision to provide liquidity has markets speculating the central bank may elect to leave rates unchanged when it meets next week..

Yesterday, we discussed the negative impact on bank deposits and assets from the Fed’s QT operations. The Fed’s QE program resulted in rapidly rising bank deposits and support for asset values as the central bank became the largest source of demand for bonds.

In a clear signal from banks, US large cap and regional bank indices are down ~10% for the week after cautious management presentations at a sell-side conference on Monday.