Banks Braced: $326B in Ghost Bonds Returns to Haunt the Yield Curve 🏦👻

Global bank stocks slid this week after the 10-year US Treasury yield climbed to 5.35%, its highest level since 2002, reigniting concerns about the bond holdings sitting on bank balance sheets. The Invesco KBW Bank ETF ($KBWB) is down roughly 13% from its August high, according to TradingView data. According to the FDIC's Quarterly Banking Profile, US lenders were still carrying $326.7 billion in unrealized losses on bonds at the end of the second quarter, a figure reported before yields moved higher again. The 10-year yield touched its 24-year high on October 7.

The selloff spread across regions. Europe's main bank index fell 3.5% on October 7, with Société Générale, Deutsche Bank, UniCredit, and Intesa Sanpaolo each declining more than 4%, Reuters reported. In Singapore, OCBC dropped 5.9% that day after Citi cut its rating to sell, while DBS and UOB also fell. "Increasingly about expectations and valuation rather than a deterioration in fundamentals," Jeffries analyst Joanna Cheah told AsiaOne, citing Singapore's banks.

Rising yields punish older, lower-paying government bonds as new debt issues offer higher coupons, a dynamic that helped trigger the collapse of Silicon Valley Bank in March 2023. SVB CEO Greg Becker told the Senate, "By the end of the day on March 9, $42 billion in deposits were withdrawn from SVB in 10 hours, or roughly $1 million every second." KBW chief Tom Michaud noted in his Q3 earnings outlook that aggregate bond losses now equal about 5% of bank capital, down from 19% in 2023. Still, he said trading-desk chatter about bond worries now resembles 2023, and warned that losses could slow share buybacks at some lenders.

The Federal Deposit Insurance Corporation reported that US deposits grew for an eighth straight quarter through June and stated, "The banking industry continued to maintain strong capital and liquidity levels." Investors, however, have been piling into cash. Money market funds drew $166 billion in a single week. JPMorgan, Goldman Sachs, Citigroup, and Wells Fargo are scheduled to report quarterly results on October 13, providing the next read on how much the bond slump has dented bank capital.