15 March 2023
Watch video discussion by Benjamin Collings and Benjamin Davison HERE.
Last week in the United States, we saw the Federal Deposit Insurance Corporation (FDIC) transfer all deposits —both insured and uninsured—and substantially all assets of the former Silicon Valley Bank (SVB) of Santa Clara, California, to a newly created, full-service FDIC-operated ‘bridge bank’ in an action designed to protect all depositors of SVB. It was a shock to the market. Additionally, we have Silvergate, a US11 b dollar asset bank that decided to wind down operations.
As context, the Silicon Valley Bank is the second largest US default since the early 2000s, so it is a wake-up call. The Federal Reserve (Fed) rates are going up and it is showing where the weaknesses are.
How does it affect our clients at the Australian Bond Exchange (ABE)?
At ABE we don’t have exposure to these banks in the US and all cash positions are held with ANZ. We also have custodians to all bondholders.
What can clients learn from this event in the international markets?
The critical matter is that this event was largely unforeseen.
We stress to clients the importance of diversification within bond portfolios, but we also promote diversification in stocks and across multiple assets. If you don’t have one asset, investigate allocating in that one.
No one has a crystal ball, you need to prepare yourself for all situations.
We have bonds with 5 to 6 per cent coupon rates in terms of three to four years, which we think is a fantastic place to be.
However, even if you have bonds we recommend that you spread across bonds, have cash, invest across assets so that when these events happen you are prepared.
Disclaimer: This advice is general and does not take into account your objectives, financial situation or needs. You should consider whether the advice is suitable for you and your personal circumstances.