Marketbites: Regional Banks Surge
Portfolio Manager Commentary:
Regional banks surged Tuesday, led by First Republic. The beaten-down bank jumped almost 30%, a day after losing 47%. The SPDR Regional Banking ETF (KRE) gained about 6%. Regionals got a boost after Treasury Secretary Janet Yellen said Tuesday morning that the government is ready to provide further guarantees of deposits if the banking crisis worsens.
Wall Street is looking toward the Federal Reserve’s announcement on its monetary policy tightening path later this afternoon. Investors are now expecting a slower pace of tightening from the Federal Reserve in light of the banking crisis. Traders currently are pricing in a 86% chance of a quarter-point rate hike when the Fed wraps its two-day policy meeting today, according to CME Group’s FedWatch tool. The probability of a pause is at 13.6%.
Chart of the Day:
Credit Suisse’s emergency merger with UBS will wipe out the bank’s riskiest bonds, rattling investors in the quarter-trillion-dollar market for similar bank debt. About $17.3 billion of the bank’s AT1 bonds will be completely written down, Switzerland’s financial regulator, Finma, said Sunday. Credit Suisse also said that the bonds would be “written off to zero.” AT1 bonds—also known as contingent convertible bonds, or CoCos—were introduced after the financial crisis as a way to transfer banking risk away from taxpayers and onto bondholders. They also became a popular investment product that money managers and banks, including Credit Suisse, marketed to clients as a relatively safe way to boost yield on bond portfolios. Even before Credit Suisse’s AT1 bonds were wiped out on Sunday, cracks spread in the AT1 market last week. Deutsche Bank AG’s $1.25 billion 6% AT1 bond fell 10% last week to about 79 cents on the dollar, according to Advantage Data Inc.
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