Once again, the weekend offered no respite from the banking drama as Swiss officials announced a plan for UBS to acquire Credit Suisse. Despite earlier assurances that the Swiss National Bank had provided sufficient liquidity for the beleaguered behemoth to survive on its own, the move failed to inspire market confidence and necessitated the weekend acquisition. This is yet another reminder that swift action on the part of regulators—while both important and welcomed—is no guarantee that contagion can be avoided. Evidence that fear remains the prominent market emotion can be found in the continuation of the flight to quality move in overnight trading which helped push the 10yr yield below 3.30%. Meanwhile, shares of First Republic—the next most likely subject of some form of intervention—fell another 18% in the early morning hours.
As the market disruption unfolds, the (ostensible) responsible party heads behind closed doors later this week in one of the most anticipated FOMC meetings in recent history to debate its next policy action. Powell’s Fed desperately wants to complete its campaign against inflation, and there is clearly more work to be done on that front. However, they face the obvious risk that another round of monetary tightening will push the proverbial tide further out, potentially exposing more financial institutions inclined to skinny dip. As it stands, futures markets have been vacillating between the likelihood of a 25 basis point hike and no hike at all with the former currently getting the nod, albeit barely. In all likelihood, market behavior over the next couple of days will inform the Committee on the best course of action.
Last week saw Treasury yields fall markedly (over 25 basis points on the 10yr), though mortgage-backed securities have generally lagged. We should expect this relationship to continue for as long as market volatility remains prominent. Trading overnight pushed yields down another 2 to 6 basis points across the curve, though early activity in MBS suggests a weaker open. Today’s economic calendar is devoid of meaningful data, so headline watching will be the order of the day. As of now, expect rate sheet pricing similar to Friday’s close, but guard against a quick reprice. Have a great Monday!