Economic Data Fixed Income Date

Financial stability to remain FOMC & Financial stability 21 March 2023

In focus to remain in focus

The Fed is likely to hike on Wednesday even if markets are screaming that they should rather cut. The first stages of
the crisis playbook are playing out. The next will be pivots from central banks.

What we can expect from Fed Commentary –

1) There is nothing to see here, but we are monitoring the situation closely.
2) This bank is an outlier, and the system is fine.
3) Will add liquidity as a safeguarding measure, but we don’t see broad-based risks.

USD liquidity swap lines have now been changed to daily operations (from weekly), which is a sign that central banks
find this to be a liquidity crisis still, which is another signal that they always fight the last war. 2008/2009 proved to be
an interbank liquidity crisis, while this crisis is different in nature. It is driven by the extraordinarily inverted yield curve
and the lack of banks willingness to increase deposit rates.

Banks have a hard time dealing with an extraordinarily inverted yield curve due to 1) the risk of a deposit flight and 2)
mark-to-market losses on bond portfolios. Underlying reasons are found in monetary policy, and this is a strong a hint
that you get that the hiking cycle is over. The next part of the crisis is to consider cuts and then QE is ultimately also in
play to safeguard the value of collateral in the system.

The Fed pricing is 50/50 ahead of Wednesday and not be surprised if the Fed delivered a hike that they will very soon
thereafter regret big time.

Fed pricing ahead of Wednesday

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Economic Data
Financial stability to remain in focus
21 March 2023
Financial stability to remain in focus

UBS & Credit Suisse Deal -

The UBS deal with Credit Suisse was obviously better than a bankruptcy, but it is relatively evident but it is forced
marriage. AT1 investors will be wiped out in the deal and even if this is only a $175bn market, it is likely going to lead
to substantial spill-overs to the European banking sector. AT1s are obviously “below” equity from a hierarchical
perspective, but at least some equity in UBS would probably have been expected by the investors. AT1s have sold off
at record pace in Asia on Monday and the bleeding might continue.

Deal is at around 30% of the market value of Credit Suisse from Friday even with public intervention and liquidity
packages included. There was no true bid for Credit Suisse and UBS has effectively been handed the keys for free. This
is NOT a bullish signal for European banking stocks, rather the exact opposite.

A brokered deal WAY below Fridays close price

The crisis is going to accelerate until central banks put financial stability above inflation in their policy mix. It will take
another while before that’s going to happen.

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Economic Data
Financial stability to remain in focus