Salt Lake City Office
2150 East 1300 South,
What You Need to Know
While we have seen bank failures before, right now this situation appears to be an isolated problem for boutique banking, not a widespread systemic problem. In the current situation, as long as you are following FDIC guidelines, the average American does not need to withdraw their money today and bury it in their backyard.
The big news this week is bank failures. The three banks that have failed so far in 2023 were mainly concentrated in tech and crypto. Bank failures are not a new concept:
Silvergate Bank, Silicon Valley Bank (SVB), and Signature Bank, are in the news having been taken over by federal regulators. These are specialty banks mainly catering to crypto, tech companies, and start- ups. When lots of people withdraw their money at the same time (called a run on the bank) a bank has to raise money quick and sometimes sell at a loss. One of the reasons these banks were taken over by regulators, was in part that they went out long on bond maturities, chasing yields and due to quick liquidations had to sell at a loss. More on bond terms, yields, and credit quality below.
Another contributing factor to the losses incurred was a lack of knowledge or disregard of how the FDIC (Federal Deposit Insurance Corporation) works. The FDIC insures up to $250,000 per account ownership, per bank. Some reporting estimates that 97% of accounts with SVB were above the $250,000 threshold. Many companies thought there was safety in numbers with ideas like “all other companies like mine have their money here so it must be the best place to put mine” while ignoring the risk.
What It Means for You
FDIC insurance is like an insurance policy for your bank, insuring up to $250,000 per account ownership, per bank. Think of this coverage like the maximum coverage you have on your car, home, or life insurance. The amount in the contract is the amount of your coverage. If you have more than $250,000 per account, per bank, the prudent option to be covered by FDIC insurance is to make changes to your accounts.
Bonds have always been thought of as a safe haven for money. Currently the yield curve is inverted—short term rates are higher than long term rates. Going long and reducing credit quality can get you yield, but you go there at your own risk.
US Economy and Credit (Bond) Markets
Week ending March 10th Yields
3 Mo. T-Bill: 4.869 Bond Buyer 40 Yield: 4.59
6 Mo. T-Bill: 5.046 Crude Oil Futures: 76.68
1 Yr. T-Bill: 4.811 Gold Spot 1,868
2 Yr. T-Note: 4.586 Merrill Lynch High Yield Indices:
3 Yr. T-Note: 4.317 US. High Yield: 8.89
5 Yr. T-Note: 3.965 BB: 7.43
10 Yr. T-Note: 3.699 B: 9.06
30Yr. T-Note: 3.707
Yes, when rates go up bond values go down. Unless you can hold to maturity, you can see losses in “safe bonds” and more losses in non-investment grade AKA “Junk bonds”. The longer the maturity and lower the credit quality, the bigger the potential loss when rates go up. In a “normal” yield curve where long-term rates are higher than short, investing in a laddered bond portfolio, with some longer-term maturities, may be a good choice depending on your situation.
We added short-term treasuries to our clients’ portfolios (1 year or less) starting in October of 2022 and continue to renew as appropriate. These are not sexy or “batting for the fences”, but they are safe and secure with a AAA credit rating with no risk of needing money before maturity that will cause selling at a loss.
We don’t like sending out reports to our clients showing accounts are not up. But we don’t make foolish mistakes with your money or ours. We don’t follow the herd. It is more time-consuming buying short-term treasuries for the fixed portions of an account, than popping an account into a high yielding bond mutual fund. It takes time analyzing risk and reward in each portfolio. We do the work for you since that is how we want our money managed.
Economic times with frightening headlines can be scary. Fear and greed move markets, also known as following the herd. Fear is measured in the market with the CBODE volatility index (Ticker Symbol VIX) also known as the fear index. On March 13th (as of Noon MST) the VIX low was 23.85 and the VIX high was 30.81.
We don’t give in to the fear and the greed, we don’t follow the herd. And while we don’t have a crystal ball to see the future, we learn from the past. We have successfully navigated through bank failures, down markets, high inflation, and high interest rates. We will continue to actively manage your money, make smart, informed decisions and stay the course.