A Barr to further contagion

On Monday, markets took comfort and rallied from the news First Citizens Bank had bought up the assets of defunct lender Silicon Valley Bank (SVB) in a copycat deal of UBS’s adoption of flailing (No) Credit Suisse. 

Investors were further reassured by the early publication of Federal Reserve (Fed) Vice Chair for Supervision Michael Barr’s testimony to the Senate Banking Committee, which is scheduled for hearings about the banking crisis on Tuesday and Wednesday. Barr’s language was unequivocal, stating, “We will continue to closely monitor conditions in the banking system and are prepared to use all of our tools for any size institution, as needed, to keep the system safe and sound.”

The terminal rate debate

US Treasury bond yields impact Gold price as they reflect interest rate expectations and the opportunity cost of holding the bright metal, which is a non-yielding asset unlike cash deposits or bonds. 

Yields rose on Monday as traders took heart from the positive news about the banking crisis being in the rear view mirror and began pricing in the possibility that the US Federal Reserve would continue cranking up interest rates in their fight with inflation. 

The yield on the benchmark 10-year US Treasury bond rose a stonking 4.65% to 3.53% in one day as market expectations flipped back to expecting the return of an aggressive Fed. 

Another barometer of the Fed’s future course of policy, however, the Fed Fund Futures Curve, is stating the opposite, indicating the probabilities continue to support the Fed pausing at their next meeting in May – and even a chance of three 0.25% rate cuts before the end of the year, suggesting rates may have already reached their terminal peak. 

The divergence may explain Gold’s current lack of direction, and the fog needs to lift on the real state of the financial system before investors can start to get a real handle on the Fed’s future plans.