The fallout from the recent bank failures will be contained. But this does not mean that the bear market in technology stocks is over, even if equities stage a short-term rally. The relative success of dealing with SVB, Signature, and Silvergate, as well as Credit Suisse, will prevent big rate cuts from taking hold. Interest rates are rising, and this will bring with it more credit risk, including for CLOs.
Technology shares have rallied on the back of a lower discount rate: the drop in nominal Treasury yields has been swift. But real yields have remained sticky. Five-year TIPS yielded 1.48% yesterday. Breakeven inflation rates may drop further, but real yields could very well regain the highs reached at the beginning of the month (e.g., 1.87% for 5-years).
Lower valuations for many VC-backed technology companies will have to be realised this year. There are still large disconnects between public and private markets. The reduced availability of venture debt post-SVB may now start to pressure some of the loftier valuations.
Some public pension funds in the US are now beginning to reduce their allocations to illiquid assets, after years of aggressive investments.
