BAC Bank of America Corporation

By Julia-Ambra Verlaine and Nick Timiraos 

The deepening Wall Street rout is adding to pressure on U.S. banks, as the retreat of investors from risky assets saddles lenders with securities they are struggling to sell at desired prices.

The crunch has been evident in the share prices of the largest U.S. financial firms, which have fallen 30% or more in many cases over the past month. Citigroup Inc. dropped 8.6% on Wednesday, extending its decline to 36%, nearly doubling the drop in the S&P 500.

Now the pain is spreading, as fears about the coronavirus's impact on economic activity intensify and as an oil-price war brews between Saudi Arabia and Russia. Traders, analysts and regulators are monitoring markets for signs that problems there are spilling over to hurt the real economy, by constraining lending.

Executives in meetings with President Trump said Wednesday the industry remains in ruddy good health. Brian Moynihan, chief executive of Bank of America Corp., said banks are in "great position" on capital and liquidity. Michael Corbat, chief executive of Citigroup, said "this is not a financial crisis."

But amplifying the uncertainty Wednesday was news from across industries. Boeing Co. drew down a $13.8 billion loan with many banks, and companies owned by some private-equity firms are being encouraged to take similar action, according to news reports. Such moves could further stretch funding and balance-sheet concerns at banks.

"When markets come under duress as they have over the past couple of weeks, asset prices are pushed to levels where you begin to see margin calls and other internal activity that is not always visible on the surface," said Daniel Deming, a managing director at Chicago-based KKM Financial.

The most surprising development for traders Wednesday: the sharp decline in the price of U.S. Treasury securities, which until this week had consistently risen significantly on days when U.S. stocks were falling. The price declines sent yields higher after dropping to record lows and were fueled in part by banks selling U.S. government securities to reduce inventories and raise cash. Rates are low enough that Wednesday's action itself didn't hurt banks, but the unusual nature of the move raised eyebrows.

People familiar with some of the largest securities-dealing banks said many firms bought corporate bonds as prices fell last week, but those purchases resulted in some banks having balance sheets that executives deemed too large. With prices barely having recovered in many markets, some banks chose to sell Treasurys instead, in part reflecting their significant appreciation in recent weeks.

Another area of worry: the rising price difference between a Treasury bond and the equivalent future, also known as the "cash-future basis." Traders said the dislocation was the worst since 2008 and reminded some of an even more acute episode in 2001 following the 9/11 attacks. Analysts and portfolio managers scrutinize the basis because signs of stress there can foretell lending pullbacks.

Trading conditions in the Treasury market "are certainly deteriorating, but it's not miserable," said Jim Vogel, an interest-rate strategist at FHN Financial. "The system is just overloaded" as investors digest rapid changes in sentiment, news about possible stimulus from Washington and financing challenges.

Similarly, the spread between the two-year Treasury yield and the overnight indexed swap, a derivative used by banks to hedge exposures created in lending and investing, has risen this week, including an increase of 0.05 percentage point on Wednesday.

"Swap spreads are showing early signs of dealer balance-sheet funding pressures," said Priya Misra, head of global rates strategy at TD Securities.

Mortgage lenders said a lack of bidding activity for mortgage bonds in credit markets led rates to rise, with quoted prices on the 30-year fixed-rate mortgage increasing to 4.375%, more than a percentage point higher than the record lows it had plumbed last week.

The share-price declines and funding-market stresses don't necessarily indicate that Wall Street is questioning the viability of the banking system, as it did in the 2008 crisis. Following that episode, banks significantly boosted their capital cushions and access to cash under regulatory scrutiny and financial legislation.

But changes in regulation and shifts in the economy have reduced the market's capacity to absorb volatility, many traders say, and the declines in bank-related markets in part reflect concerns about how a test of the new regime might play out for some lenders.

The cost to insure bank bonds against default rose sharply, suggesting investors are worried about a funding pinch. The cost of insuring against default on Citigroup debt for five years rose to $115,000 annually from $40,000 this week, according to FactSet, though it remains well below the panicked pricing seen in 2008.

Adding to those concerns were additional ructions in the market for repos, the repurchase agreements that serve as a short-term funding mechanism for many financial firms.

The Federal Reserve Bank of New York said Wednesday it would ratchet up the amount of cash it injects into money markets beginning Thursday through collateralized loans known as repurchase agreements, or repos. It increased the amount of overnight repo offerings to $175 billion from $150 billion. It will also offer $50 billion in one-month loans on Thursday and again on March 16 and March 23.

Those transactions will boost to more than $500 billion the amount of cash the Fed is providing through such repo lending, using a mix of overnight, two-week and four-week loans, expanding its $4.2 trillion asset portfolio to levels last seen in 2017. Repo lending outstanding from the Fed dropped to a low of $126.2 billion on Feb. 28.

Mr. Vogel said the Federal Reserve could help calm markets by increasing its purchases of Treasury bills, which it has been doing at a pace of $60 billion per month since separate problems first flared in short-term lending markets last fall. That would free up resources from broker-dealers to finance other securities rather than Treasury bill auctions.

Mr. Vogel also said the Fed could slow the runoff of its holdings of mortgage-backed securities as another pressure-release valve. Currently it allows up to $20 billion in mortgage bonds to mature from its $4.2 trillion bond portfolio every month.

Get an early-morning coronavirus briefing each weekday, plus a health-news update Fridays: Sign up here.

Write to Julia-Ambra Verlaine at Julia.Verlaine@wsj.com and Nick Timiraos at nick.timiraos@wsj.com

(END) Dow Jones Newswires

March 11, 2020 20:24 ET (00:24 GMT)

Bank of America (NYSE:BAC)
Historical Stock Chart
From Mar 2024 to Apr 2024

Bank of America (NYSE:BAC)
Historical Stock Chart
From Apr 2023 to Apr 2024