Wall Street’s Paper Bond Losses Rear Head Again as Yields Rise

After investment losses tore through the US financial system this year, a fresh slump in bank stocks shows some investors fear the problem — which at its most extreme claimed a handful of lenders — hasn’t gone away.

Unrealized losses on bank securities’ portfolios will likely increase in the third quarter after a steep rise in yields eroded the value of those holdings, according to analysts. That’s contributed to a sharp decline in bank stocks, with the KBW Bank Index falling 6% since a September Federal Reserve meeting signaled another hike could be on the way. The index is down 23% this year.

“Clearly the run-up in bond yields at the long end of the curve, which has led to the increases in unrealized bond losses, is weighing on the stocks,” said RBC Capital Markets analyst Gerard Cassidy. “The scar tissue is so thick in the long-only investment community from what happened in March, that they’re not ready to come back into the bank stocks in any meaningful way.”

But while such losses likely expanded, they don’t pose the kind of threat that ended up sinking Silicon Valley Bank, Signature Bank and First Republic Bank, according to analysts. Deposits at banks have stabilized, meaning they likely won’t be forced to sell these assets - and crystallize the losses.

“While SIVB continues to be the flashpoint comparison on this topic, we want to emphasize that banks will not be forced to sell one dollar of HTM securities unless there is a material deposit run,” UBS Group AG analysts led by Erika Najarian said in a note. “The reason we think the stocks are rather oversold is that macro funds appear to be back and shorting banks for existential reasons.”

Bank Stock Volatility Spiked in March