Talk about a U.S. recession is driving a wedge between U.S. bank stocks and Treasury yields.
They’ve split apart in recent weeks on concern that aggressive tightening by the Federal Reserve will erode economic growth, curtailing loan demand and forcing banks to increase their allowances for bad loans. The S&P 500 Banks Index has lost 17% since early February, while the 10-year Treasury yield has climbed past 2.6%.
It’s a dynamic that’s shifted dramatically from earlier this year, when banks and yields were reliably moving higher, and financial shares were viewed by traders as the hallmark value trade.
Back then, the bet was that higher yields would translate to fatter bank profits and wider net interest margins. In 2021, the S&P 500 bank shares surged 32%, handing investors one of the best returns of any U.S. industry.
Now the analysis seems to be changing, and analysts are factoring in the negative hit of slower economic growth. Goldman Sachs Inc. analysts lead 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.
This article was provided by Bloomberg News.