Turbulência no Setor Financeiro Gera Redução nas Taxas de Juros

Financial Turbulence Generates Reduction in Interest Rates

In recent days, the financial market has experienced turbulence, raising questions about the health of the banking system. As Silvergate, Silicon Valley, and Signature banks announced financial difficulties, with Silicon Valley Bank (SVB) declaring bankruptcy on Friday, March 17, 2023, with billions of dollars in negative balance sheets, most of which are related to high-risk investments such as cryptocurrencies.

It is fair to say that the current market is undergoing a stress test in the policy of The Federal Reserve (Fed), as its economic tightening implemented at the beginning of 2022 to combat inflation is finally showing its effect, and the first victims were small banks that did a poor job of managing their funds in relation to interest rates. Stay Informed, in today's column, I bring information about what is happening in the American market and how this crisis has impacted the banking sector.

The SVB heavily invested in long-term government bonds, mortgage-backed securities, and high-risk cryptocurrencies. Unfortunately, bond prices have an inverse connection with interest rates, and when rates rise, bond yields fall. As a result, the SVB's bond portfolio began to lose considerable value as the Fed rapidly increased interest rates to combat inflation. Without enough money, the institution began to sell some of its high-loss bonds and declared bankruptcy within 48 hours

It is important to state that almost all banks and individuals who own bonds, cryptocurrency and other digital assets have suffered enormous losses in their portfolios. That being said, SVB is probably not the only one dealing negatively with the increase in interest rates. But don't worry, your mortgage still has value, and if the bank that originated your loan or bought your debt goes bankrupt, your mortgage will be bought by another bank or investor.

Treasury Secretary, Janet Yellen, stated that she is keeping an eye on other institutions, as the collapse of prominent SVB is a clear warning sign for the banking sector, and it remains to be seen how it will affect other institutions; she also says that it will be difficult to deal with rampant inflation and a banking confidence crisis simultaneously.

It is still too early to tell where this banking turbulence is leading us. However, the immediate effect was a considerable reduction in interest rates, as the market's reaction to the fear of even more bank closures caused investors to return to buying Treasury bonds because they are safer, generating an increase in bond yields, which resulted in a drop in rates, which in turn had a major impact on the real estate market. The Mortgage Bankers Association reported that the index of residential applications volume rose 6.3% in the last two weeks.

In summary, the bankruptcy of SVB caused turbulence in the American financial sector; however, the demand for loans remains strong. Therefore, we must keep an eye on what is to come. The next meeting of the Federal Open Market Committee (FOMC) is scheduled for May 2nd and 3rd, and in the meantime, if the Fed concludes that the issues related to SVB's bankruptcy indicate weakness in the market induced by the increase in the Federal Funds Rate, it is possible to believe that the FOMC will change its current monetary policy to avoid a greater banking crisis, which in turn could reflect in lower interest rates for those looking to buy or refinance a property. In my opinion, it seems that things may get better "for us" earlier than we thought!