Hana Securities "SVB Bankruptcy Lowers Possibility of 50bp Rate Hike"

"US 10-Year Bond Appropriate Upper Range 3.98~4.10%"

Hana Securities analyzed on the 14th that the bankruptcy of Silicon Valley Bank (SVB) is not a basis for the transmission of banking system risk or a sudden shift to interest rate cuts by the Federal Reserve (Fed), but rather a factor that lowers the possibility of tightening reacceleration.

Kim Sang-hoon, a researcher at Hana Securities, stated, "Powell and the Fed are now at a point where they need to reconsider financial stability in addition to employment and inflation."

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Researcher Kim said, "Since February, major U.S. economic indicators have exceeded expectations, highlighting the need for reacceleration again, but at that time, the 'SVB bankruptcy' financial instability event occurred." However, he analyzed, "The structure of large banks is not as vulnerable as that of small and medium-sized banks, and since active rescue by authorities has been confirmed, the possibility of systemic risk is low."

Despite the authorities' swift announcement of countermeasures after the SVB bankruptcy, the Bloomberg Financial Conditions Index plunged to the most restrictive level since May 2020. Researcher Kim explained, "Even with the February CPI announcement scheduled, the market is inevitably sensitive to immediate asset collapse (Wealth Destruction) rather than lagging indicators."

The implied interest rate of the Overnight Index Swap (OIS) also began to reflect a terminal rate of 4.8% (May) and three and a half rate cuts by the end of the year. This path is even lower than the previous bottom of the 2-year U.S. Treasury yield (January 18), which reflected a terminal rate of 4.9% (May) and two rate cuts by year-end.

Additionally, it is evaluated that major market prices have started to indicate 'recession' again from 'no landing' due to the SVB bankruptcy. The 2-year U.S. Treasury yield recorded the largest cumulative drop over two and three trading days since Black Monday in 1987.

The copper-to-gold ratio is also moving in line with the 10-year U.S. Treasury yield. Since copper is generally considered procyclical and gold is regarded as an inflation hedge, this ratio implies real interest rates. However, this too suggests economic slowdown.

Researcher Kim pointed out, "Since 1977, except for once in 1998, whenever the number of U.S. Treasury yields from 3 months to 30 years below the federal funds rate reached the current level, it has always coincided with a recession."

Researcher Kim emphasized, "In October 2018, Powell stated that the neutral rate was far away, but changed his opinion to just below the neutral rate within a month. At that time, the 10-year U.S. Treasury yield experienced a sharp drop of 68.4 basis points from 3.237% to 2.553%."

He added, "I maintain the view that the appropriate upper bound for the 10-year U.S. Treasury yield is between 3.98% and 4.10%, and the appropriate level is in the mid-3.3% range."