The federal government’s efforts to backstop the banking system, and deals found to put SVB Financial and Signature Bank in new ownership, seems to have stabilized the financial sector, and calmed markets.
Joseph Abate, an interest-rate strategist at Barclays, says the Federal Reserve’s establishment of the Bank Term Funding Program as well as the abundant cash raised from advances borrowed from Federal Home Loan Banks has allowed banks to accumulate large buffers to meet deposit outflows. “And while market psychology is still fragile, our sense is that deposit outflows from small to large banks will fade as depositors recognize they can access and transfer their balances without any hitches,” says Abate.
The S&P 500 SPX, +1.42% closed Wednesday above 4,000 and the yield on the 2-year Treasury TMUBMUSD02Y, 4.096% topped 4%.
But Abate says a second wave of deposit departures has started — to money-market funds. Depositors generally have kept their money in banks despite paltry returns, usually thanks to the broad array of services that banks provide, as well as what Abate calls “deposit rate inattentiveness.”
“It is too hard to shift balances or to establish a new relationship with another institution unless there is a large, convincing yield pickup. But some of it could reflect the fact that after 15 years of near-zero rates, depositors are not in the habit of paying much attention to the yield on their cash balances,” he says.
Whatever the reason, depositors now see they can earn more yield in a money market fund with potentially less risk, Abate says.
He says it’s not unusual for deposit rates to lag Federal Reserve rate hikes. But they do typically catch up, and often rise even after the Fed has finished lifting rates.
Money-fund balances have risen an average of 20% over the past four rate hike cycles, which would imply this time around that balances could grow by $ 1 trillion. And an academic study suggests that every 100 basis points of Fed hikes leads to between $ 100 billion and $ 150 billion of flows into money funds over two years, which suggests a rise between $ 500 billion and $ 800 billion.
So far, Abate says, the increase in balances is about $ 600 billion, with nearly half of that since March 10.
“We think the inattentiveness threshold has been reached and the second wave of deposit outflows has begun, and we expect banks to compete more aggressively for deposits,” he said.
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