SVB Bailout Brings Back QE, Fuels A Rally In High Tech Stocks And Bitcoin, So What's Next?

SVB's bailout at the end of the previous week brought back Quantitative Easing (QE)--the Fed's buying of Treasury bonds and Mortgage-Backed Securities (MBS)--pushing bond yields lower and fueling a rally in tech shares and Bitcoin.

A bailout by another name is still a bailout. And so is QE by another name.

U.S. regulators do not call it a bailout, but the Federal government's takeover of Silicon Valley Bank and Signature Bank was just that. One way or another, the Federal Reserve would have to take over the assets of the two banks, which include Treasury Bonds MBS.

As of December 2022, SVB's balance sheet included $17,22 billion of Treasury bonds and $91.46 MBS. Signature Bank's balance sheet included $146 million in Treasury Bonds and $20.62 billion in MBS.

While these numbers are insignificant compared to the vast size of the U.S. Treasury and the MBS market, they sent a clear and loud signal to traders and investors that the nation's central bank is ready to return to the old regime of free money if necessary.

Meanwhile, the failure of the two banks raised the speculation of an imminent credit crunch that would slow down lending and spending across the economy, easing further inflation pressures in the months ahead.

The return of the QE and the prospects of easing inflation were music to the ears of Treasury bond traders and investors seeking to lock into the current high yields while enjoying the protection of the Federal government.

As a result, U.S. Treasuries staged a robust rally, which drove prices higher and yields lower.

At the closing of Friday's regular session, the benchmark10-year Treasury bond was trading with a yield of 3.40%, down from around 4% a couple of weeks ago.

Lower yields, in turn, make high risk assets more appealing than low risky assets. Thus, a big rally saw in tech shares and Bitcoin for most of the week.

So what is next for Wall Street? It all depends on whether the high-profile failure of SVB is an isolated case or the beginning of something more serious.

Anthony Denier, CEO of Webull, believes it is the former rather than the latter, as the failure of SVB is a case of lousy asset-liability management.

"Silicon Valley Bank is not a canary in the coal mine," he told International Business Times. "It's more a single company's management error because of the way it laddered its Treasury portfolio. Over the past year, as interest rates rose, most banks laddered their bond portfolios with different durations and hedges to mitigate interest volatility and losses, but SVB did neither."

Still, he doesn't see the problem going away anytime soon.

"The problem is the deposit base," he explained. "With the cost of capital rising so much over the last 18 months, many small companies are worried because if there is any indication their cash is at risk or anything bad happening, you're going to see money moving around," he explained.

Then there are the losses to the stock and bondholders of these banks, who lose everything. "This could facilitate a large credit crisis that people aren't discussing, especially if the regulators take over more distressed banks," he said.

Regarding the stock market's direction, he believes it all depends on what the Fed does at its next meeting. "Does it raise rates by 50 basis points as it indicated last week, or 25 basis points, or pause?" He asked. "At this point, it's anyone's guess, but a rate hike would hurt stocks, and a pause would spark a rally. But also, if we see more banks start to fail, that could also send the market tumbling."

Mathew Tuttle, Chief Executive Officer & Chief Investment Officer of Tuttle capital management, sees the stock market going nowhere.

"We have been stuck in a trading range for a while based on a battle between the Fed and investors who didn't believe they would have the guts to raise rates as high as they said they would," he told IBT. "That battle is probably over as the current banking crisis makes it hard for the Fed to raise rates as high as previously expected."

Still, he thinks that not raising rates because the banking system is a mess is hardly a bullish sign for markets. "Until we get through this, it is hard to see the market rally go anywhere," he added. "Focus on 3800 to the downside and 4200 to the upside on the S&P 500. A break of either would be a change in trend."