With the collapse of Silicon Valley Bank early in March 2023, markets are experiencing increased volatility. Especially, the banking sector was hurt substantially. It also led to the collapse of other banks, such as Silvergate and Signature Bank. With the recent shock in the stock market following the collapse of SVB, other banks are feeling the pressure and there may be more defaults on the horizon. Even established banks such as Credit Suisse are now in a very dangerous situation. While the stock market started strong in the year 2023, the most recent shock almost evaporated all the gains of the beginning of the year. The S&P 500 is now only up 2% from the beginning of 2023. The SVB collapse also induced further volatility in the Treasuries market, which was quite volatile even before due to discussion on continuously increased rates by the Fed. The 10-years US Treasuries were close to hitting the 4% mark again, but fell by almost 50bps after the SVB collapse. The impact on 1-year Treasuries was even more severe, resulting in a drop of almost 80bps. Within two days, the 2-year yields dropped almost 50bps, which only happened in five prior crises before. Figure 1 shows the historical drops in 2-year yields after the Black Monday in 1987. Cryptocurrencies also experienced a similar volatility increase. Bitcoin was steadily trading around the $23k and $24k mark in the past month. After the initial announcement, it dropped to $22k and later on shortly below the $20k mark. Nonetheless, it seems that Bitcoin already recovered this shock and surged above the $26k mark.
With inflation remaining high, rates are trading higher than at the beginning of the year. While the view for 2023 is still largely pessimistic, in January the view shifted to more optimism, when most assets posted strong gains. However, this optimism faded to some degree again in February 2023. With inflation only going down slowly, more and more market participants expect rate cuts later than previously expected. This stance is also further supported by the central banks, especially by the Fed and ECB recently. In the US, this led to a substantial rise in longer maturity yields. Nonetheless, the yield curve inversion is still severe. Over the past weeks, yields on 6m- and 1Y-Treasuries have surpassed the 5%, whereas the 10Y-Treasuries are close to the 4% mark. The current yields also are also alarming for the real estate market that now sees a crisis ahead. House prices plummeted since 2020. At least, the impact is not that large as it has been during the global financial crisis, but it could still reach those levels with more time. The now high mortgage rates lead to a strong decrease in home construction. The last time it was this low was back in 1995. The particularly alarming thing is that this is despite the already strongly decreasing house prices. With rates unlikely to go down substantially any time soon, the industry is under significant pressure, which is likely to persist for a while. While the decreasing house prices are substantial, compared to its history, this decline is very small. Since the global financial crisis, the median house price in the US has doubled. In this context, the affordability of housing and in particular construction is at a very low level.