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Wall Street soul Grilling: Could 'safe' U.S. debt be the tipping point for the next crisis?

Release Time:2023-03-16

In a short weekend, Silicon Valley Bank and Signature Bank collapsed one after another, and the banking crisis continued to spread, even to the century-old investment bank Credit Suisse. The Swiss National Bank has announced an emergency liquidity injection.

In this crisis, US Treasuries, traditionally regarded as the safest asset in the world, became the toxic asset at the centre of the maelstrom. Some even think that US Treasuries could trigger the next financial crisis.

Chris Crawford, a fund manager at Eric Sturdza Investments, said in a recent report:

"Whereas the 2008 financial crisis was triggered by 'ninja loans' to people with no income, no job and no fixed assets, the' toxic 'assets that will trigger the next crisis will be government bonds!

Of course, this is not to say that US Treasury bonds are similar to the risky assets in the financial crisis. The reason why government bonds became "toxic" is that the Fed raised interest rates continuously, which led to the decline in the value of the bond market. Some banks that failed to manage the interest rate risk well faced huge floating losses. May be forced to sell debt at a loss to meet depositors' withdrawals.

Federal Deposit Insurance Corporation Chairman Glenn Berg has previously said U.S. banks have $620 billion in unaccounted losses on bond investments by the end of 2022.

Even if banks can avoid realising their losses or have enough capital to absorb them, worries about bank liquidity could trigger a run on depositors.

Silicon Valley Bank is a bloody example. Much of its customer money comes from demand deposits at technology companies. And a significant proportion of the deposit base is not covered by deposit insurance.

Such depositors are not bound by services such as custody, cash management or clearing, are rate-sensitive and easily moved. If there is doubt about a bank's solvency, depositors are the first to jump the gun. In a single day, $42 billion was withdrawn from Silicon Valley Bank, plunging it into a liquidity crisis.

Neil Dutta of Renaissance Macro Research told reporters that if not for the crisis in the banking sector, this week's uncooled CPI data would have led the Fed to raise rates by another 50 basis points.

But the latest data from the futures market showed a 34.3 per cent chance of no rate rise next week and a 65.7 per cent chance of a 25 basis point rise, compared with a 90 per cent chance of a 50 basis point rise before the Silicon Valley Bank explosion.

Risk warning and disclaimer clause

The market is risky and investment needs to be cautious. This article does not constitute personal investment advice and does not take into account the particular investment objectives, financial situation or needs of individual users. Users should consider whether any opinion, opinion or conclusion in this article fits their particular situation. Invest accordingly at your own risk.

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