Bank stocks are on the hook for a huge loss this year as interest rates go up, but the reserves of the industry are at their highest levels in 20 years. Since the Federal Reserve said in September that they could keep rates up for longer than expected, the stock market has been in a bearish mood and the Treasury market has been on the ropes.
There’s nothing stopping higher yields, but it’s clear that it’s bad news for banks.
Higher yields on new Treasury bonds reduce the worth of portfolios that had lower coupon debt when rates were low. Banks also usually have a lot of commercial real estate loans that might be hard to pay off if rates stay high for a while.
In the year to date, the financial sector in the S&P500 index has fallen 5.5%, while the popular financial ETF XLF has dropped 5.5%. It’s expected to drop even further in 2023.