Written by Cormac Nevin.
Markets were rattled last week, with the MSCI All Country World Index down -4.5% in GBP terms. What was different to the reaction vs the sell off we witnessed last year, however, was that high quality bonds had a very respectable rally at the same time, with the Bloomberg Global Aggregate Index up +1.1% in GBP Hedged terms. Japanese Equities were also up +0.9% over the week.
The source of the worry was a bank that you will not typically find on the high street, but which is very important to high-growth tech companies both in Silicon Valley and across the globe. Silicon Valley Bank (SVB) was the bank of choice for venture capital funds investing in high growth tech companies. The bank received massive inflows in deposits during the tech boom we witnessed over 2020/2021. They needed to find safe assets to invest these deposits into and made concentrated investments in US Treasury Bonds. Crucially, they failed to hedge these bond exposures against rising interest rates which is what most banks would have done. As the Federal Reserve raised rates hard and fast over the last year, SVB’s bond portfolio took large losses leading to a flight of deposits and a crash in the share price. This is the standard-issue reflexive loop of a traditional bank run, made worse by lack of diversification in the bank’s depositor base which was concentrated in VC Funds and tech start-ups.
After much speculation while markets were closed over the weekend, it transpired on Sunday night that banking regulators in the US would make depositors whole in an effort to stop the doom loop in its tracks. All depositors, including those whose funds exceed the maximum government-insured level, will be able to access their deposits in full, according to a joint statement by U.S. Treasury Secretary Janet Yellen, Fed Chair Jerome Powell and Federal Deposit Insurance Corp Chair Martin Gruenberg. In the UK, HSBC announced that they would buy the UK arm of SVB for the notional amount of £1. This underscores how healthy the rest of the global banking system is and leads us to believe that while this event is largely the consequence of higher interest rates and poor risk management from SVB, the contagion effects will likely be limited.
As ever, never neglect diversification, even if you are a tech whiz in Silicon Valley.