The inversion of the yield curve — the market indicator that has rattled Wall Street — has had a particularly pronounced effect on US regional banks, whose shares are among the worst performers of the past few weeks.
So-called asset sensitive banks, those with a business heavily weighted towards floating-rate loans such as to businesses, face a hit to their profits because of the slump in yields, which pulls down the interest they will receive.
Another result: in some cases, their shares appear to have started trading in lockstep with changes in the yield curve.
“The moves up and down on a daily basis [in response to] the curve have been so violent and so quick that I’m not sure it is traditional asset managers that are causing this,” said Anton Schutz, who manages a portfolio of smallcap bank stocks at Mendon Capital.
He suspects that macro hedge funds and algorithmic traders have the banks in their sights. “Machines are trading this,” he said.
The yield curve describes the yields on different maturities of US government debt, and its inversion — when rates on long-term bonds fall below those on short-term debt — has been a reliable indicator of recessions in the past.
It also makes it much harder for asset sensitive banks to make money, since they cannot offset falling income from floating rate loans by cutting the rates they pay depositors, since these are already at rock bottom. Larger banks can have other fee-based businesses such as wealth management or payments that make their profits less sensitive to the yield curve.
Shares in institutions including Silicon Valley Bank, Comerica and Citizens, Wall Street darlings just a year or two ago, have traded in lockstep with the change in the relationship between threemonth Treasury bills and the 10-year note.