Yields rise as central bank efforts to calm markets take hold

Yields rise as central bank efforts to calm markets take hold


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NEW YORK — Treasury yields rose on

Monday as the takeover of Credit Suisse and central bank steps

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to shore up liquidity helped allay investor concerns as they

gauge whether the Federal Reserve may pause its raising of

interest rates later this week.

Major central banks, faced with the risk of a fast-moving

loss of confidence in the stability of the financial system,

moved on Sunday to bolster the flow of cash around the world.

The two-year U.S. Treasury yield, which often

moves in step with interest rate expectations, rose 4.9 basis

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points to 3.895% after sliding to 3.635% earlier in Europe.

The two-year yield has plunged about 135 basis points in

eight trading sessions after it peaked on March 8 at a 15-year

high of 5.084% following hawkish congressional testimony by Fed

Chairman Jerome Powell.

Days later Silicon Valley failed, sparking a rout in

banking stocks and fears not only that central bank monetary

tightening would spark a recession as rising credit costs

crunched both businesses and households, but also of a global

banking crisis.

The rise in yields suggests a massive flight to quality

last week and early in Asia has ebbed.

“All the major central banks are behind making sure that

things turn out right,” said Tom di Galoma, co-head of global

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rates trading at BTIG, speaking in London.

“Nobody has cut rates, but at the same time there’s a

growing feeling amongst U.S. investors, and especially from

myself, that the Fed probably has to take a pass this week and

probably won’t increase rates,” said New York-based di Galoma.

Fed funds futures show a 26.9% probability of the Fed

holding its overnight rate at a current 4.5%-4.75% when

policymakers conclude a two-day meeting on Wednesday, CME’s

FedWatch Tool shows.

But the market also is betting the Fed cuts rates this

summer and that by December its target rate is 3.912%, down from

roughly 5.6% two weeks ago.

Late on Sunday, UBS Group AG agreed to buy Credit

Suisse Group AG in a deal engineered by Swiss

authorities. UBS will pay 3 billion Swiss francs ($3.23 billion)

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for its smaller rival and assume up to $5.4 billion in losses.

The takeover came after the 167-year-old Credit Suisse

became the biggest victim of the turmoil unleashed by SVB’s

collapse, even after it received $54 billion in funding from the

Swiss National Bank last week.

The central banks’ action on Sunday echoed steps taken to

offset the impact of the COVID-19 pandemic in 2020 and efforts

to bolster global finances after the U.S. housing market

cratered and stoked the Global Financial Crisis in 2007 to 2009.

The yield on benchmark 10-year Treasury notes

rose 6.3 basis points to 3.460%.

The Treasury yield curve measuring the difference between

yields on two- and 10-year notes, which is seen as

a recession harbinger, narrowed at -44.0 basis points.

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The curve last week reduced its inversion to -28.6 bps, the

narrowest spread since October, as investors quickly reduced the

rate hike scenarios this year.

The 10-year TIPS breakeven rate was last at

2.117%, indicating the market sees inflation averaging about

2.1% a year for the next decade.

March 20 Monday 9:56 a.m. New York / 1356 GMT

Price Current Net

Yield % Change

(bps)

Three-month bills 4.41 4.5189 0.060

Six-month bills 4.5975 4.7822 0.028

Two-year note 101-90/256 3.8947 0.049

Three-year note 102-108/256 3.7591 0.057

Five-year note 102-24/256 3.5342 0.068

Seven-year note 102-224/256 3.5292 0.070

10-year note 100-84/256 3.4603 0.063

20-year bond 100-208/256 3.8162 0.053

30-year bond 99-128/256 3.6525 0.051

DOLLAR SWAP SPREADS

Last (bps) Net

Change

(bps)

U.S. 2-year dollar swap spread 24.75 -2.00

U.S. 3-year dollar swap spread 12.75 -1.75

U.S. 5-year dollar swap spread 9.50 -2.00

U.S. 10-year dollar swap spread 2.00 -1.75

U.S. 30-year dollar swap spread -44.00 -0.75

(Reporting by Herbert Lash, additional reporting by Ankur

Banerjee in Singapore and Georgina Lee in Hong Kong; Editing by

Simon Cameron-Moore and Chizu Nomiyama)

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UBS shares fall after Credit Suisse rescue deal

UBS shares fall after Credit Suisse rescue deal


UBS shares tumbled more than 10 per cent in early trading on Monday after analysts warned that the Swiss bank’s rescue of rival Credit Suisse threatened to distract management and damage returns this year.

Swiss regulators orchestrated the historic takeover at the weekend after outflows from Credit Suisse accelerated last week, deepening fears over the future of the country’s second-largest bank.

Shares in UBS were down 13 per cent at SFr14.79. The all-share deal valued Credit Suisse at $3.25bn, less than half the bank’s market capitalisation at the close of trading on Friday.

“UBS has traditionally operated a high returning, high quality, stable franchise,” analysts at Keefe Bruyette & Woods noted. “The acquisition of Credit Suisse throws much of this into question, in our view.”

While RBC analysts said that “the acquisition of CS by UBS seems attractive on paper longer term, we think this is unlikely to be the preferred route for UBS, but it appears to have been a necessary move not just for Swiss banks but the global banks sector overall”.

The decline in UBS shares came as the deal failed to extinguish fears over the global banking sector, which was rocked by the sudden collapse earlier this month of California-based Silicon Valley Bank.

As part of the deal, UBS secured a loss guarantee of up to SFr9bn ($9.8bn), but only after the bank had borne the first SFr5bn of losses on certain portfolios of Credit Suisse’s assets. As part of the deal, the Swiss National Bank also agreed to offer UBS a SFr100bn liquidity line.

In a memo on Monday to UBS’s 74,000 staff, chief executive Ralph Hamers said Credit Suisse should be treated as a competitor until the deal has closed.

“Please remember that, until this deal closes, Credit Suisse is still our competitor and we cannot discuss business matters with their employees or take any action that could be interpreted as a step toward the merging of business,” Hamers wrote.

Swallowing up its smaller rival cements UBS’s position as the world’s largest wealth manager, with operations spanning the US, Europe, the Middle East and Asia. The combined entity will have $5tn of invested assets globally.

UBS chair Colm Kelleher said on Sunday that UBS intended to keep Credit Suisse’s Swiss business, but it intended to shrink the group’s investment bank.

Hamers told staff in the memo that “bringing UBS and Credit Suisse together will build on UBS’s strengths and further enhance our ability to serve our clients globally, deepening our best-in-class capabilities”.



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Saudi National Bank to lose $1.2B on Credit Suisse rescue

Saudi National Bank to lose $1.2B on Credit Suisse rescue



Saudi National Bank chairman Ammar Al Khudairy’s comments last week may end up being one of the most expensive answers delivered on television.

On Sunday, UBS announced that it would take over its rival Credit Suisse for $3.2 billion, in a deal shepherded by Swiss regulators in order to head off financial panic. That’s significantly less than the $8 billion the bank was worth on market close Friday. 

Saudi National Bank, Credit Suisse’s largest shareholder, will see the value of its stake, purchased for $1.5 billion in October, drop by $1.2 billion after the UBS deal, according to Bloomberg

Comments from Ammar al Khudairy on Wednesday precipitated Credit Suisse’s crisis. When asked by a Bloomberg reporter whether the Saudi bank was willing to invest more money in Credit Suisse if it required more funds, al Khudairy bluntly responded “the answer is absolutely not,” citing regulatory reasons.

“If we go above 10%, all new rules kick in,” said al Khudairy, explaining why the Saudi bank wouldn’t go beyond its current 9.9% stake. 

The comment spooked Credit Suisse investors and customers, who had already gone through years of bad news, including scandals, constant leadership changes, and billion dollar losses. Saudi National Bank itself became Credit Suisse’s largest shareholder as part of a $4.3 billion capital raise the Swiss lender held in 2022 ahead of a planned restructuring. 

Credit Suisse shares dropped by 24% the same day as Al Khudairy’s comments, and its bonds sank to distressed levels. By the day’s end, Credit Suisse announced it would borrow as much as $54 billion from the Swiss National Bank, the country’s central bank.

Al Khudairy later tried to walk back his previous comments, saying that Credit Suisse had not asked for assistance, and that the panic his comments sparked was “unwarranted.” 

The Saudi National Bank chairman blamed the wider banking crisis, sparked by the failure of Silicon Valley Bank, for why investors jumped on his comments. “If you look at how the entire banking sector has dropped, unfortunately, a lot of people were just looking for excuses,” he told CNBC on Thursday. Yet he still refused to invest more money into Credit Suisse, again blaming regulations.

Al Khudairy’s walk back ended up coming too late: While Credit Suisse shares recovered on Thursday following the lifeline from the Swiss central bank, depositors continued to pull their money from the bank, forcing the Swiss government to shepherd a rescue from fellow bank UBS.

About a fifth of Credit Suisse’s stock was owned by investors from the Middle East, such as the 9.9% stake owned by Saudi National Bank, and the 6.8% stake owned by the Qatar Investment Authority. 

Bondholders lose even more

But equity holders like Saudi National Bank are at least getting something in the UBS-Credit Suisse deal. Shareholders are getting one UBS share for every 22.48 shares of Credit Suisse, which UBS calculated was equal to around $0.82 per share. (Credit Suisse shares were trading at around $2 before the weekend)

As part of its takeover of Credit Suisse, UBS is writing down $17 billion in so-called Additional Tier 1 bonds. These bonds were pioneered after the 2008 financial crisis, and are either written down or converted to equity if a bank’s capital buffers fall below a specified level. The $17 billion writedown is the largest in Europe’s AT1 market since its inception. 

Some of Credit Suisse’s bondholders are angry that they’re losing everything while shareholders are still getting paid out. “This just makes no sense,” Patrik Kauffmann, a portfolio manager at Aquila Asset Management AG said to Bloomberg. “Seniority in the capital structure need to be respected.” 

AT1 bonds in some Asian banks fell by record levels Monday following the wipeout in Credit Suisse bonds.

Saudi National Bank and other Credit Suisse shareholders tried to offer $5 billion in new financing for the bank, in a deal that would have preserved the bank’s bonds, reports the Wall Street Journal. Swiss regulators rejected the offer.

Credit Suisse’s shareholders, like Saudi National Bank, are out of luck if they’re upset about the UBS rescue. The deal does not require approval by the shareholders of either UBS or Credit Suisse, thanks to regulatory changes from the Swiss government.



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Yields rise as central bank efforts to calm markets take hold

China keeps lending benchmarks unchanged in March, as expected


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SHANGHAI — China kept its benchmark lending rates unchanged for the seventh straight month in March, as expected, with the economy already benefiting from policy actions taken last week as it recovers from the pandemic.

The need for more imminent monetary easing subsided after the People’s Bank of China (PBOC) said on March 17 it would cut the amount of cash banks must set aside as reserves, market watchers said.

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On Monday, the one-year loan prime rate (LPR) was kept at 3.65%, while the five-year LPR was unchanged at 4.30%.

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“The necessity and urgency of interest rate cuts in the short term are not very high,” said Bruce Pang, chief economist at Jones Lang Lasalle.

Although the recovery was still gathering pace, China was constrained in easing monetary policy by such factors as the yuan exchange rate and global monetary tightening, he said.

Economists say that if China cuts interest rates as other countries raise them, widening yield differentials will put downward pressure on the yuan and risk capital outflows.

A bout of data in the past two weeks has shown that economic activity picked up in the first two months of 2023 as consumption and infrastructure investment drove recovery from pandemic disruption. That has offset weak global demand and a persistent downturn in China’s property sector.

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In a Reuters poll conducted last week, all 22 participants predicted no change to either loan prime rate. Such unanimity has been rare in previous surveys.

Xing Zhaopeng, senior China strategist at ANZ, distinguished the central bank’s objectives in managing the LPR, its main tool for promoting or restraining demand, and the reserve requirement ratio (RRR) that it imposes on banks. Last week’s RRR cut had been a reaction to the collapse of two regional U.S. banks this month, he said.

“The central bank’s RRR cut was more of an emergency response to prevent overseas banking crisis from spilling over to China,” Xing said.

SPILLOVER EFFECTS

Xuan Changneng, a deputy governor at the PBOC, said on the weekend that the collapse of Silicon Valley Bank (SVB) had showed how rapid shifts in monetary policy abroad were having spillover effects.

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An RRR cut nonetheless also promotes economic growth, so economists thought that last week’s made an LPR cut less likely.

In another move last week to lift demand, the PBOC ramped up medium-term liquidity injections when rolling over maturing policy loans, although it kept the interest rate on those loans unchanged. That rate, called the medium-term lending facility rate, serves as a guide to changes in the LPR.

Some economists still see room for the LPR to fall this year to support lending and lift investor confidence.

UBS expects the PBOC to encourage commercial banks to adjust deposit rates downward, cutting the banks’ funding costs and making some room for the central bank to cut the LPR just a little.

“China’s LPR may be lowered slightly by 10 basis points in the rest of 2023, which could help lower the actual funding cost for the real economy and mortgage rates,” said Wang Tao, UBS’s chief China economist.

Most new and outstanding loans in China are based on the one-year LPR, while the five-year rate influences the pricing of mortgage loans. China last cut both LPRs in August to boost the economy.

(Reporting by Winni Zhou and Brenda Goh; Graphics by Kripa Jayaram; Editing by Himani Sarkar and Bradley Perrett)

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