As everyone who follows headlines probably knows, SVB Financial Corp. hit the top of the news cycle starting late last week when its bank division, Silicon Valley Bank, entered receivership with the FDIC. Depositors had been withdrawing their cash deposits from the bank at an accelerating pace due to concerns about the bank’s portfolio of government securities, and Silicon Valley couldn’t fulfill all the withdrawal requests. At the time of receivership, corporate assets totaled $210 billion and its senior unsecured debt was rated A3/BBB.
Over the weekend, the Federal Reserve (Fed) responded with additional liquidity to help restore confidence, stabilize markets, and alleviate liquidity pressures in the financial system. It created a new Bank Term Funding Program. This program offers loans of up to one year to banks, savings associations, credit unions, and other eligible depository institutions pledging U.S. Treasuries, agencies, mortgage-backed securities, and other qualifying assets as collateral. Importantly, the Fed will value the securities “at par.”
Silicon Valley Bank’s shocking failure put considerable pressure on broad financial markets as fear spread and liquidity dried up. Stock prices fell, bond prices rose, credit spreads widened, and the U.S. dollar weakened.
Here at Allspring, we, as investment professionals, are in the business of managing risk, and we continued to employ our ongoing, perpetual, and multilayered risk management process. Below, several leaders within our risk management, fixed income, and equity teams share their teams’ perspectives on these recent events.
Investment Analytics
John Hockers, CFA, PRM & Randy Mangelsen, CFA, CQF, FRM, PRM; Co-Heads of Investment Analytics
The speed at which Silicon Valley Bank and Signature Bank went from large, well-respected banks to effectively defunct entities has been the most surprising aspect to our team. It’s quite rare to see a company fail while also being a member of the S&P 500 Index.
When a material market event occurs, like the failure of a U.S. bank, our Investment Analytics team immediately turns to our Aggregate Exposure dashboard, a tool that allows us to quickly assemble a list of all discretionary holdings managed at Allspring along with a variety of key information. Over the past weekend, we used this tool to quickly find every penny of Allspring exposure to these banks. While Silicon Valley Bank is still operating after the FDIC seizure of the bank holdings company, we’ve suspended trading with it until further details are known regarding its ultimate fate. As for Signature Bank, it was not an approved trading counterparty on our platform.
For further insights on how our Investment Analytics team has been responding to recent bank failures, click here.
Fixed Income
George Bory, CFA; Chief Investment Strategist
Fallout from the collapse of Silicon Valley Bank and subsequent policy responses from the Fed, FDIC, and U.S. Treasury likely mark an inflection point in policymakers’ current tightening cycle. The impact of tighter monetary policy is finally being felt, and the economic consequences are becoming real. At this juncture, it’s critically important that the Fed preserve the integrity of the financial system. As a result, its inflation-fighting program may need to go on pause as stability of the financial system is priority number one.
In fixed income markets, this suggests to us that interest rate volatility will remain high. Furthermore, we think lower yields and a steeper curve are likely. Credit spreads could come under pressure, but segmentation across the market is likely as weak credits are exposed and strong credits thrive. The knock-on consequence of tighter credit conditions will likely hasten a mild recession by year-end. Broadly speaking, we’ve positioned our investments for this outcome and believe our commitment to active management and diversified risk management should help mitigate investment volatility throughout this period.
Equity
Ann Miletti; Chief Diversity Officer, Head of Active Equity
Now is the time to be selective. It isn’t the time to own everything. With today’s higher interest rates and higher inflation, some bankruptcies will happen. Investors should know more about the companies they are investing in at this part of the cycle. Do those companies:
- Have healthy balance sheets (the right capital structures)?
- Strong free cash flow per share?
- Management teams with good risk controls and experience through difficult times?
Searching for companies with these characteristics aligns with Allspring’s expertise in active management.
Allspring will continue its vigilance in monitoring and responding to all risks revealed through our investment and risk management processes, and we’ll provide further updates as events occur.
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