Banks fall in widening equities and yields gap

(Bloomberg) Bank stocks fell for the sixth day as growing concern about a recession in the United States opened an even greater gap between performance and the increase in Treasury yields seen in recent weeks.

The KBW banking index fell 1.3% on Wednesday in its longest bearish streak since Jan. 27, even as 10-year yield rose above 2.6% for the first time in three years. Shares of major banks, including Citigroup Inc., JPMorgan Chase & Co. and Morgan Stanley, fell by at least 1.5%, while regional names such as Western Alliance Bancorp, PacWest Bancorp, and United Community Banks, Inc. fell 2% or more.

“The main reason for selling bank shares today would be the anticipation that the Federal Reserve will be too aggressive with its monetary policy in its efforts to reduce inflation, causing the US economy to enter recession in 2022,” RBC Capital Markets analyst Gerard Cassidy wrote in a note.

The gap between banking stocks and yields has grown in recent weeks amid concerns that a sharp tightening of the Federal Reserve's monetary policy will erode economic growth, reducing the demand for loans and forcing banks to increase their loan allocations uncollectible. The KBW banking index has fallen by almost 19% since it reached an all-time high in early January, while the 10-year Treasury yield has increased.

It is a dynamic that has changed dramatically since the beginning of this year, when banks and yields were moving up reliably, and traders considered financial stocks to be the operation of distinctive value.

Back then, the bet was that higher yields would translate into higher bank profits and wider net interest margins. In 2021, the KBW banking index increased by 35%, giving investors their best returns since 2013 and almost reached its highest increase since 1997.

Now the logic seems to be changing, and analysts are taking into account the negative impact of slower economic growth. Analysts at Goldman Sachs Inc. led by Richard Ramsden said last week that profitability could suffer in a stagflation scenario, but the impact would be softer than during a normal recession.

Investors will keep an eye on the minutes of the Federal Reserve meeting, which will be released on Wednesday afternoon. The statement will help give the market a clue as to the pace of upcoming interest rate hikes, as well as how quickly the central bank plans to reduce its balance sheet. Traders are currently betting that the Fed will increase rates by another 225 basis points by the end of the year, in what would be the most intense adjustment cycle since 1994.

Original Note:

Banks Slide as Recession Fears Widen Gap Between Stocks, Yields

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