Recession Worries Widens Gap Between Bank Stocks and Bond Yields

Bank stocks fell for the sixth day amid increasing worries about a U.S. recession, driving a wedge between their performance and rising treasury yield in recent weeks.

The KBW Bank Index dropped 1.4% on Wednesday even after the 10-year yield rising above 2.6% for the first time in three years.

Big bank stocks in the U.S., including Citigroup Inc., JPMorgan Chase & Co. and Morgan Stanley all fell by at least 1.5%, while regional names such as Western Alliance Bancorp, PacWest Bancorp and United Community Banks, Inc. were all lower by 2% or more.

“The primary reason to sell bank stocks today would be the anticipation that the Federal Reserve will be too aggressive with its monetary policy in its efforts to reduce inflation which results in the U.S. economy going into a recession in 2022,” RBC Capital Markets analyst Gerard Cassidy wrote in a note.

Amid concerns of aggressive monetary policy tightening by the Federal Reserves the split between bank stocks and yield has grown in recent weeks. The policy tightening has brought concerns on economic revery which lead to lower demand for loans as well as banks are increasing their provision for bad loans.

The KBW Bank Index has tumbled nearly 19% since hitting a record high in early January, while the 10-year Treasury yield has surged.

Generally a higher yield lead to fatter bank profits and wider net interest margins.

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.