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In a Wild Day For Markets, Bonds And Stocks Rally But Banks Crater

US authorities raced over the weekend to put together a package of emergency measures that would snuff out fears about the health of the banking system.
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NEW YORK, NEW YORK - FEBRUARY 01: Traders work on the floor of the New York Stock Exchange (NYSE) during morning trading on February 01, 2023 in New York City. Stocks opened low this morning amid news of another interest rate increase by the Federal Reserve in its continued effort to slow inflation. (Photo by Michael M. Santiago/Getty Images)
NEW YORK, NEW YORK - FEBRUARY 01: Traders work on the floor of the New York Stock Exchange (NYSE) during morning trading on February 01, 2023 in New York City. Stocks opened low this morning amid news of another interest rate increase by the Federal Reserve in its continued effort to slow inflation. (Photo by Michael M. Santiago/Getty Images)
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US authorities raced over the weekend to put together a package of emergency measures that would snuff out fears about the health of the banking system.  

On Monday, it had limited success, at best.

US bonds rallied sharply and stock indexes were broadly higher, but in the one sector that matters most right now — regional bank stocks — losses piled up at a frantic clip. Shares of First Republic Bank plunged as much as 79%, PacWest Bancorp 60% and Western Alliance Bancorp 85%.

The message investors are sending is clear: the emergency measures, which include guaranteeing all depositors’ money and providing easier loan terms to banks squeezed for cash, may not be enough to protect banks that even vaguely resemble the three regional institutions that collapsed into government hands in recent days. 

“What shakes investors to their core is the continuous aftershocks that come after something like this,” said Thomas Thornton, founder of Hedge Fund Telemetry. “You’re always on edge. There’s a lot of risk left in this market.”

All the news in markets wasn’t bad on Monday, though. The rally in Treasuries, one of the biggest seen in decades by some measures, brings some much-needed relief to the balance sheets of those banks saddled with the same sort of long-term loans and bonds that the ill-fated Silicon Valley Bank had loaded up on. Shares of First Republic, PacWest and Western Alliance also traded off their lows of the day.

The frantic demand for Treasuries, which sent yields on some notes plunging more than half a percentage point, was fueled by traders’ sudden realization that the Federal Reserve is unlikely to push interest rates much higher.

Its quest to tame inflation, the thinking now goes, comes second to the health of the nation’s bank sector. Investor concern has focused on the regional banks that weren’t subject to the same sort of regulatory scrutiny in recent years as the big Wall Street banks.

Traders in swaps markets have downgraded their bets for another quarter point by the Fed next week. Goldman Sachs Group Inc. economists as well as money managers from Pacific Investment Management Co. are saying the Fed could take a breather after ratcheting up rates to the current range of 4.50-4.75% from 0% in just 12 months. What’s more, some are betting the Fed will cut rates three times in the second half of the year.

That plunge in yields helped buoy US stocks more broadly, with the S&P 500 Index steadying in the afternoon session after an early selloff. The tech-heavy Nasdaq 100, which is sensitive to moves in interest rates, rallied 1% as shares of the biggest technology names, including Microsoft Corp., Apple Inc. and Amazon.com Inc., climbed.

But all eyes were on bank stocks. The KBW Bank Index, one of the main gauges for the financial industry, sank 10%, following a 16% plunge last week.

Investors “are now rushing for the exits without thinking twice,” Adam Crisafulli, founder of New York-based Vital Knowledge, wrote in a note to clients. “The challenge for regulators is to break the feedback loop between plunging bank stocks and the signals this sends to deposit holders as the former sows panic in the latter.”

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