How Did The SVB Event Change Market Structure?

1/ Prior to this event, Jerome Powell’s Senate testimony corroborated the higher-for-longer narrative. Resultantly, a severe rate trajectory was priced in, with the market expecting a ~5.5% terminal rate to be hit in the fall & only one small rate cut to occur thereafter in 2023

2/ When the SVB event occurred, that changed & the market quickly adopted a dovish tilt. In comparison to the previously outlined rate trajectory, as of March 10th the market anticipated a terminal rate of ~5.3% to be hit in the summer & more severe rate cuts to occur thereafter

3/ The VVIX, the vol of vol, quickly changed as well. Over the last year, the VVIX steadily declined as the view that the markets would likely slowly grind down was adopted. At the end of last week, this behavior reversed & a year of volatility declining was quickly repriced

4/ In addition, the two-year yield, despite surging above 5% in the earlier parts of last week, dropped in one of the highest-magnitude manners seen in recent memory, dipping below the federal funds rate of 4.75%

5/ Lastly, despite the Fed announcing it will make additional funding available to eligible depository institutions so that they can meet the needs of their depositors, this event still quickly shifted market structure from extreme hawkishness to dovishness…

6/ As we make our way through a continually uncertain environment, the question becomes whether market structure will stay like this over fears of weakening stability, or if we will shift back to the hawkish trajectory seen earlier last week that may be needed to quell inflation