Selling Bank Bonds in a Sell-Off: Has It Paid to Wait?
Although the U.S. government and Federal Reserve reacted quickly to the collapse of Silicon Valley Bank, a closer look at the spreads and pricing of bank bonds indicates that investors might have lost some faith in the resiliency of U.S. banks during the depths of the sell-off. Regional banks’ bonds suffered a heavy blow, with credit and bid-ask spreads having more than tripled, while diversified banks’ bonds were only moderately impacted.
The recent crisis in historical perspective
For investors who reduced exposure to U.S. regional banks’ bonds, timing proved crucial. Such was also the case in previous periods of bond-market upheaval. For example, we previously looked at Italian bonds in 2018, during a period of political turmoil, when bid-offer spreads recovered even while credit spreads remained at high levels. As a result, patient sellers may have avoided excessive transaction costs by not initially selling, but waiting until liquidity conditions improved.
In the wake of the recent disruption, banks’ credit spreads remain significantly elevated, but there are signs that liquidity has started to recover. Will the previously observed pattern play out again? This may be a question to consider for investors thinking of selling the bonds of regional banks.
Liquidity plunged, but partly recovered, following the SVB collapse
MSCI Liquidity Risk Monitor
Corporate bond and bank loan liquidity improved the first half of Q1, but transaction costs increased rapidly during the March banking turmoil. Signs of recovery were observed near the end of the quarter.Read the report
Banking Crisis: Is a Storm Brewing or Behind Us?
Despite turmoil in the U.S. and European banking industries, the broader equity market was resilient, with the MSCI USA and MSCI Europe Indexes returning 3.6% and 2.5%, respectively, in March.Read the quick take
Banking on the Brink of Crisis? Three Scenarios for Investors
While the broad equity market remained relatively resilient in the wake of bank failures and banking stocks’ subsequent plunge, the big question for investors remains.Read the quick take