I wanted to comment Jeffrey Snider’s observations at RealClearMarkets to your attention. It’s accurate as usual and somewhat less opaque than usual. Here’s the kernel:
The latest instance of this modern version of a bank run, the one which took down Silicon Valley Bank and Signature is largely of the same “substance.” Virtual cash was drained from both for various reasons, but it did not disappear into public hands. Rather, it migrated to others in the system as more book entries.
Therefore, the failures of SVB and Signature are uninteresting and pretty much irrelevant. The more important question is the same one about arbitrage; how there wasn’t any to help either of them. What must be inhibiting wholesale redistribution from those who have benefited from this migration, and was it specific to these two banks?
While we have no way of knowing for sure, it’s not as if we don’t have useful clues. Money market prices such as eurodollar futures give us a systemic sense of arbitrage potential, more so the risks dealers might be perceiving when considering them. And it is here where trading over the past week has been both illuminating and frightening.
Single-day moves in eurodollar futures contracts were historic. The price for the September 2023, for example, gained nearly 45 bps last Friday, March 10, in the wake of SVB’s seizure. That was almost the same as the March 2009 contract had been moved on September 15, 2008, the day Lehman Brothers’ insolvency was made public.
But then on Monday, March 13, a buying panic in these hedging instruments became so intense, the same September 2023 added an unthinkable 101 bps! In a single day, more than double Lehman. After a relatively small reverse on Tuesday, massive buying stuck again on Wednesday with the contract rising another 35 bps.
What do these moves tell us about perceptions of systemic risk? Bill Dudley, then the Federal Reserve System’s Open Market Manager, spilled the secret on August 7, 2007:
“MR. DUDLEY. That said, the Eurodollar market is a very deep market, and if one thought that the Fed was not going to do what the market priced in, there certainly would be the ability of people to take the other side of the bet…In the short run, that kind of thing certainly goes on. If I can’t sell the bad asset that I hold, then I will buy something that will perform well if the bad asset deteriorates.”
He goes on to say that whatever we want to call what’s happening is far from over. That’s what the markets are telling us.