US bank bonds weakened on Thursday after SVB Financial Group sold equity to shore up its capital position, raising investor concern about how much rising rates have hit other firms’ balance sheets.
The moves were generally the sharpest in a few months, but not big enough to signify serious fear just yet. Spreads, or the extra yield that bonds pay compared with Treasuries, widened by 0.08 percentage point, or 8 basis points (bps), for Bank of America Corp.’s 5.015% bonds due July 2033.
That’s the most in a day since November 2022. But the level of spreads for the notes, at 164 bps, is similar to mid-January.
Spreads on a basket of riskier high-grade bank bonds jumped by 8 bps to 180 bps. It was the biggest one-day widening since October 2022 for the subordinated bank bonds, or securities in line to be paid after senior debt. Spreads are now at their widest level since January, according to data compiled by Bloomberg, signifying greater risk.
The cost to protect individual banks’ debt against defaults using credit derivatives also rose. For example, the cost of five-year credit derivatives on Morgan Stanley widened about 10 bps to 88.8 bps.
The weakening came after Silicon Valley Bank’s parent, SVB Financial, said it was selling common equity and mandatory convertible preferreds to boost capital levels after it sold securities it held and realized losses. The company also said it has lower deposits than it expected, and updated its forecast for the year to include a sharper decline in net interest income.
See also: China regulator is looking for buyers of SVB’s local venture
“The question is who is next,” said Arnold Kakuda, Bloomberg Intelligence bank debt analyst. “That is the fear.”
SVB’s notes weakened much more: The spread on the company’s 1.8% senior unsecured bonds maturing 2026, widened 115 bps to 241 bps, the most widening on record, according to Trace.
SVB’s Chief Executive Officer Greg Becker held a conference call on Thursday advising clients of SVB-owned Silicon Valley Bank to “stay calm” amid concern about the bank’s financial position, according to a person familiar with the matter.
S&P downgraded SVB Financial Group’s long-term rating to BBB- from BBB, saying the repositioning of SVB’s balance sheet “reflects increasing pressure on its profitability and deposits caused by the market’s expectations of benchmark interest rates rising and remaining higher for longer to tame inflation,” according to a statement Thursday.
