All METARs are aware that three regional banks failed within the past couple of months. The entire sector has been hammered. The market has shown real panic/ short selling behavior.
It’s possible that this sector really will fail, triggering a new financial crisis along with depression in the heartland. Regional banks provide 80% of local and regional commercial and industrial lending. If many of them fail the economic pain could be widespread. On the other hand, it’s possible that this panic selling is overdone, providing an opportunity.
While I am usually a very cautious, risk-averse investor, I occasionally add a little “cayenne pepper” to the mix by buying a falling knife during a panic. This served me well when I bought XOM in March 2020 when oil was in contango.
I just invested in SPDR® S&P® Regional Banking ETF (KRE).
Only time will tell whether the investment will be a tasty spark in my portfolio or I will get burned.
If the sector really does have widespread failures, the problem may turn out to be a lot more Macro than a small falling knife.
J P Morgan has already been given leave to exceed the 10% rule and looks like expanding its operations further. I just wonder if the powers that be want to eliminate these small banks and have us all under same banking roof.
One Bank to rule them all, One Bank to find them, One Bank to bring them all, and in the darkness bind them In the Land of Wall Street where the Shadows lie.
(apologies to Tolkien)
I don’t trust either banks or governments with my currency
Tim used to point out that Canada does fine, with only a handful of banks. That is probably the goal of TPTB for Shiny-land, except without all the “burdensome”, “job killing” regulations that prevent the Canadian banks doing predatory/stupid things.
I read this report on the Stanford Business School site but couldn’t post the link:
The U.S. banking system’s market value of assets is $2.2 trillion lower than suggested by their book value of assets accounting for loan portfolios held to maturity. Marked-to-market bank assets have declined by an average of 10% across all the banks, with the bottom 5th percentile experiencing a decline of 20%. Most of these asset declines were not hedged by banks with use of interest rate derivatives.
Sound like bad news for taxpayers who will no doubt pick up the bill for this!
I used ChatGPT to do some bond analysis a while back. Here is the text of it.
Ok say a 10 year treasury bond is bought at the treasury auction at face value, the bond has a 5 percent yield. Suppose the next day interest rates drop to 4 percent, how much did the market value of the bond change
ChatGPT
When the bond was issued at auction, it had a yield of 5 percent, which means it pays an annual interest of 5% of its face value. Therefore, for a bond with a face value of $1000, the annual interest payment is $50 ($1000 x 0.05).
If the interest rates drop to 4 percent the next day, new bonds will be issued with a yield of 4 percent, and the value of the 5 percent bond will increase because it pays a higher interest rate than the current market rate.
To calculate the new market value of the bond, we need to discount the future cash flows (i.e., the interest payments and the principal repayment) by the current interest rate.
The current interest rate is 4 percent, which means the bond’s future cash flows need to be discounted by 4 percent to determine its present value.
Using a financial calculator or spreadsheet, we can calculate the bond’s new market value as follows:
What is the size of the bond market compared to the stock market
ChatGPT
The bond market is significantly larger than the stock market. According to the Securities Industry and Financial Markets Association (SIFMA), the size of the global bond market was around $128 trillion at the end of 2020. In contrast, the total market capitalization of global stock markets was around $95 trillion as of December 2020, according to World Federation of Exchanges (WFE) data.
This means that the bond market is roughly 1.3 times larger than the stock market. It’s important to note, however, that the bond market is more decentralized than the stock market, with many different types of bonds issued by a wide range of entities, such as governments, corporations, and municipalities. In contrast, the stock market is generally dominated by publicly traded companies. Additionally, the bond market tends to be less volatile than the stock market, with bonds generally considered to be a more conservative investment option.
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Now thinking it through, if Treasury bonds can provide that kind of return when the FED lowers interest rates, what type
of return might one get from preferred stock, or senior debt from banks?
If one was to find a well capitalized bank being hammered by an irrational market, these bonds and preferred stocks could be a very low risk high return investment.
Moreover, a bank in actual bankruptcy, or one being force sold, could be in a situation where the dividends and bond payments are suspended. However, if there is anything left after bankruptcy, the senior bond holders, the preferred stock holders would not only be made whole, the back dividends and interest payments would be made.
In an actual bankruptcy, these instruments might be purchased for the price of the interest payments only.
DH has been buying bank bonds with high yields. He is checking the financial soundness of the banks using https://weissratings.com/ in addition to their S&P and Moody’s ratings.
@qazulight the bond market is highly fragmented, unlike the stock market which is centralized. Treasury bonds can be bought at TreasuryDirect.gov or via brokerages like Fidelity. The Fidelity web site has a section that lists bonds and CDs: Research → Fixed Income → different sections for government, corporate and CDs. Other brokerages list different bonds. I don’t know how much overlap there is.
Since the list has thousands of bonds it’s best to filter based on the type of bond, the desired maturity, whether or not it is callable, and the rating of the bond.
No expert here, but your brokerage’s offerings and interface will drive what you can trade. Then it’s a matter of how good/bad the interface and associated filters are.
I’ve used Vanguard which I feel is decent. I’ve traded (bought) Treasurys and brokered CDs (FDIC insured), both new issue and secondary market. You can buy new issue via a brokerage and I think you will tend to get better pricing (no bid-ask spread to give up) that will be closer or even the same as institutional pricing (eg, same price that a large investment manager like a mutual fund will get when they purchase bonds). You should be able to buy new issue munis as well, but I haven’t tried because yields have been so low for so long. I’ve only browsed Agencies and Corporate offerings, but have not looked seriously at those categories. Watch out for callable bonds and zero coupon, nothing wrong with them, but understand the risks.
I’d much rather buy Treasurys from a brokerage than TreasuryDirect which has a painful user experience.
@WendyBG@MarkR or anyone
Anyone with recent experience buying munis that they would be willing to share? How easy/difficult is it to buy new issue?
This is absolutely true. It’s also why [retail] bond traders almost universally recommend using multiple brokers for searching and trading. There used to be a very knowledgeable person on the bond board that discussed this at length.
Treasuries and CDs are the easiest ones to trade. That’s because they are essentially all “equal” in quality and therefore all you need to do is pick the highest net yield. For example, a few days ago I searched for new issue CDs a few months out, and there were 4 yielding 5.1%, and the rest yielding less than that. They were all similar maturity date. Guess which ones I bought? Since they are essentially equal, I bought each of the 4 highest yielding ones. The reason I split it among 4 of them is in case one or more of those banks end up in FDIC receivership at maturity time, and in case there is some sort of delay resolving it, that way 3/4 of the money will be available immediately, and the other 1/4 will come when FDIC resolves it (usually over the weekend anyway, but just in case).
I’ve never bought an individual muni bond in my life. I live in a state without an income tax, so I haven’t seen the need to do so. Of course, if net yield would be higher after federal taxes, I would consider munis as well. I checked a few weeks ago (when I realized the huge amount of taxable interest I had compared to the previous 20+ years), but munis are still not better than taxable treasury bills or CDs or even my brokerage money market sweep account.
Not fer nuthin’, but I wonder how well that works these day. This story on the downfall of SVB tells that it was less than a week before Moody’s decided to downgrade SVB until it completely fell apart. And they gave the bank notice that the downgrade was coming, which precipitated the bank’s behind-the-scenes machinations to try to stave off the collapse.
I had to register to get to read the whole thing (my “complimentary” story) but it’s a fascinating behind-the-curtain look at what went on, shows some maneuvers by Goldman, how the bond ratings were behind the curve, and how the attempts to save the bank actually killed it (well, it was going to be dead anyway.)
Worth registering with a spam address, at least. Similar to a short version of Michael Lewis’ “The Big Short”.
