US Steps After SVB Likely Spurred Bond-Fund Outflows, Study Says
US regulators’ swift action in March to ring-fence the banking sector after the collapse of Silicon Valley Bank might have had an unintended consequence of driving cash out of bond funds, by enhancing the appeal of deposits.
That’s the assessment of two Federal Reserve Bank of New York researchers writing in a Liberty Street Economics blog post Tuesday.
Following the March 12 announcement of the SVB rescue plan, bond funds had net daily outflows spread across the entire sector for almost three weeks, Nicola Cetorelli and Sarah Zebar wrote, drawing on Morningstar data to track the activity. While the outflow was probably not sufficient to raise potential financial stability concerns, it does warrant further investigation as even small-scale asset sales could dislocate prices in illiquid markets, they said.
US authorities in March took extraordinary measures to shore up confidence in the financial system, including creating a backstop to protect all depositors as well as the Fed launching a new Bank Term Funding Program. The BTFP, as it is known, offered one-year loans for a range of high-quality assets under easier terms than typically provided, and was seen as a way to prevent fire sales of such securities by banks.
“Bank deposits suddenly became comparatively safer on Monday, March 13, after the facility started to function,” Cetorelli and Zebar said, referring to the BTFP. “Consequently, the value of the liquidity services provided by holdings in bond funds might have diminished relative to those provided by bank deposits.”