Both Biden and Yellen said that the banking system is resilient, but all three indicators are red. Among them, the US sovereign credit risk based on one-year CDS, also known as the risk of dollar depreciation, exceeded the level when the US sovereign credit rating was downgraded by Standard & Poor’s in 2011.
Although US President Biden and Treasury Secretary Yellen both said that the domestic banking system is resilient, the three major indicators all turned red.
One of them is the FRA-OIS spread. It rose to its highest pre-Lehman crisis level outside of the COVID-19 pandemic, underscoring a sharp rise in credit risk for systemic banks.
Wall Street has mentioned that FRA-OIS is one of the most important indicators reflecting the financing tension in the interbank market and the risk of the money market, and it is also an important pressure indicator that the Federal Reserve Powell is also paying close attention to its rise every time. It is seen as a market gauge of how expensive or cheap banks are to borrow in the future relative to risk-free rates, such as those on U.S. Treasuries.
The last time FRA-OIS rose to such a high level was at the beginning of the outbreak of the new crown epidemic in the United States in March 2020. USD QE.
Lyn Graham-Taylor, senior rates strategist at Dutch bank Rabobank, commented that it is unrealistic to think that banks do not have sharper judgment on who they borrow from. In the United States, relatively speaking, there are restrictions. Of course, the banking system will come under pressure when everyone looks at each other’s business models and wonders if any one is having problems.
Another metric, the average cross-currency basis swap, which measures dollar liquidity around the world, has narrowed sharply over the past two sessions as companies hoard dollars. This reflects that the world is looking for cash and willing to pay cash to reflect on its own balance sheet.
The last indicator is the US sovereign credit risk based on the one-year US credit default swap (CDS) spread, which can also be called the depreciation risk of the US dollar. It has already hit a record high, surpassing levels seen at the height of the 2011 downgrade of the U.S. sovereign credit rating by S&P and the height of the federal government shutdown in 2013.
Piet Christiansen, chief analyst at Danske Bank, commented that we are now seeing a move that is more indicative of stress than anything else.
The financial blog Zerohedge warned Biden and Yellen that the banking system is not in trouble, but in trouble. That may be why cryptocurrencies, so-called alternative currencies, have surged this week.
In the morning hours of U.S. stocks on Monday, the trading price of Bitcoin regained the $24,000 mark, the first intraday test of $24,600 since late February, an increase of nearly $3,800, or about 18%, from the intraday low in early trading in the Asian market.
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