Bond liquidity during the Silicon Valley Bank crisis: What the data tells us

On March 10, 2023, Silicon Valley Bank (SVB) became the largest bank by assets to fail since the financial crisis of 2008.[1] The cause of the collapse was clear, at least in hindsight: the unhedged treasury assets during a time of increasing interest rates, coupled with a weak tech sector that drew down their savings[2], triggered a modern-day digital bank run. There were additional contributing factors to the mosaic theory that pointed to an imminent failure, such as the CEO liquidating shares via a controversial SEC rule[3] and a prominent venture capitalist calling on his portfolio companies to immediately withdraw their funds from SVB[4]. In this article, we offer a data perspective to the unfolding of the SVB crisis—in particular, through the bond liquidity quoting data—and build a play-by-play narrative around market sentiments and behaviors during the event.

Price, traded volume, and quotes data

S&P Global offers a vast and comprehensive liquidity database across multiple asset classes.[5] This article focuses on corporate bond data, and specifically, the price, traded volume, and quote data as defined below.

• The price of an asset is the most publicly available manifestation of investor actions; broadly speaking, it is the collective view of the market of the asset’s fair value.
• The traded volume indicates the variance in the market participants’ opinions of the fair value of the asset. High traded volume indicates a perceived mispricing of the asset, often during times of price discovery.
• Quote data consists of

1. Bid and ask ranges: the difference between the maximums and minimums of the bid and ask prices. A large range indicates a variance in the market’s perception of a fair value of the asset.
2. Bid and ask volumes: the total volume of bids and asks queried by market participants. They indicate the intent to execute a trade, either to buy (bid) or sell (ask) the asset.

Note that the quote data is unique in that it indicates directional bias—bid or ask—that the investors hold in aggregate. However, quote data only shows interest and does not necessarily translate to a trade; as such, there are cases where quote and traded volume metrics may seem contradictory, for example:

• High quote volume but low traded volume indicates that there is high interest in investors positioning into this trade, but they are cautious to execute at prices that are even slightly suboptimal. This may indicate weak conviction by investors, or possibly those acting on nonpublic information and are careful not to impact the market too much.
• Low quote volume but high traded volume indicates that investors are not interested in getting the best price to buy or sell and are more inclined to execute the trade. This may indicate a fire sale where investors have mandates to “sell at any price.”

The SVB crisis: A timeline

Liquidity data for SVB corporate bonds provides valuable insight into how the bond market collectively reacted before, during, and after the crisis. The following chart shows the bid and ask quote price data, as well as the traded volume during February and March of 2023. These metrics are based on averages over 12 unique bonds issued by SVB at the time. 

Source: S&P Global Marketing Intelligence. Data as of 19^th October 2024. For illustrative purposes only.

Armed with the full liquidity picture, we construct the following narrative of the SVB crisis:

• Weeks leading up to March 3: The bond prices decline slowly but steadily. Between February 8 and March 3, the total bid quote volumes more than double those of total ask quotes, indicating an interest in the market to buy the bonds. This suggests that the market assessed the SVB bonds to be undervalued based on public information at the time.
• March 6 and 7: The seeds of a reversal in bid and ask quote volumes that appeared at the end of the previous week is now in full force. This is noteworthy since, at this point, no public information was available that conclusively pointed to the upcoming insolvency. Note that the bond prices and bid and ask ranges did not noticeably change.
• March 8: SVB announces they have taken “strategic actions to strengthen [their] financial position”, with a goal to raise 2.25 billion dollars from asset liquidations, equity and convertible bond sales, and capital raised from equity funds.[6] The ask quote volume is more than six times the bid quote by this point; however, the traded volume is at pre-crisis levels. This indicates that the market still has not digested the dire situation unfolding within SVB.
• March 9: Depositors of SVB withdraw 42 billion dollars by the close of business, leaving the bank with a negative cash balance of about 1 billion dollars.[7] Bond prices fall by more than 7 percent; ask and bid quote volumes continue to rise rapidly, and trade volume begins to rise from minimal levels. Bid and ask ranges begin to widen, indicating a start of the price discovery phase.
• March 10: SVB is shut down and placed into receivership under the Federal Deposit Insurance Corporation (FDIC).[8] Traded volume rises as bond prices drop to distressed/default levels. It is noteworthy that the quote volumes drop from the day before, which is likely a fire sale situation.
• Week of March 13: Over the weekend, the FDIC, Treasury, and Federal Reserve announces that all depositor funds will be protected regardless of whether they are above the $250,000 threshold or not. On March 13, President Biden makes a morning address where he says, “We’ll do whatever is needed” to assure that the “[US] banking system is safe.”[9] The SVB bonds are in full price discovery mode, with high volatility, wide bid ask spreads and wide bid and ask ranges. Interestingly, the bid quote volumes exceed the ask quote volumes, indicating investor interest in bidding on the distressed bonds, and corroborates the reason for the rising bond price. Trade volume remains elevated throughout the week.
• Beyond March 20: The initial price discovery phase winds down. By March 24, although bid-ask spreads and bid and ask ranges are still elevated, bid, ask, and traded volumes are down to pre-crisis levels. By the end of March, the spreads and ranges also return to pre-crisis levels.

Liquidity solution in buy-side risk

The S&P Global Market Intelligence Buy-Side Risk Solution offers a unique way to leverage the liquidity quote data for bonds. The underlying liquidity model utilizes the time series of historical liquidity quote data to forecast future available liquidity, both on the bid and ask sides, and computes the optimal strategies to minimize time, cost, or market impact, with configurable constraints. Analyses such as presented in this article, can be used to generate liquidity stress scenarios to model portfolio liquidity during crises.

About the S&P Global Market Intelligence – Buy Side Risk Solution

The S&P Global Market Intelligence Buy Side Risk Solution empowers risk teams with agile, cloud-native analytics that scale with your firm. It supports pre-trade risk assessment, investment decision-making, and enhances risk architecture. This next-generation portfolio risk management platform covers market, liquidity, and climate risks, offering comprehensive asset class coverage and unrivaled data sources.

Key features include the ability to calculate Value at Risk (VaR) and expected shortfall using various methodologies, compliance with regulatory risk measures, and decision support tools like stress testing and pre-trade scenarios. Its powerful risk modeling capabilities allow for full revaluation of complex products, flexible aggregation, and customizable risk engines, ensuring a complete view of portfolio risk factors.