More and more investors are wagering that the banking sector will rebound and that regional banks are in much better shape than originally thought, according to an article in The Wall Street Journal. After a deal with federal regulators for First Citizens Bancshares to buy pieces of Silicon Valley Bank was reached, the Nasdaq Bank Index which tracks commercial lenders rose 2.9%. At the same time, U.S. Treasury prices fell after surging in the wake of SVB’s collapse in early March.
Those gains would indicate that Wall Street is feeling more confident about investing in banks. But although there haven’t been any new bank failures, data from the Fed shows that there was a significant amount of deposits moved from smaller to larger banks, as well as increased demand from banks to borrow from the Fed, following SVB’s collapse. And while many investors believe that this tremor in the banking sector is temporary and that the rush to move deposits will subside, there is still concern about regional bank stocks. However, SVB was unique in that it had seen an enormous amount of losses relative to its size in its portfolio of government-backed bonds due to higher interest rates, unlike other major banks. And those bonds are still guaranteed to be fully paid upon maturity, allowing banks to borrow them from the Fed at face value. Indeed, some managers are now buying up regional bank bonds, such as Ryan Jungk of Newfleet Asset Management. “The underlying asset quality is good,” Jungk told The Journal, especially since the banking crisis that some predicted has failed to materialize.
In spite of the turmoil in the banking sector, the S&P 500 has been virtually unaffected, while U.S. government bonds have had one of the largest rallies in years. That could indicate that investors believe issues in the banking sector will slow down the economy and the Fed will be forced to start cutting rates. Banks’ stocks and bonds have also plummeted; even after the Nasdaq’s recent gain, it’s still down 22%. But it might be easier for bonds to rebound than stocks, because debt investors are reliant only on the solvency of banks while lowered earnings expectations could drag stocks down. But one thing that could threaten both stocks and bonds is banks’ exposure to commercial mortgages, which could see its value damaged by higher interest rates and more work-from-home situations. While Michael Collins of PGIM Fixed Income told The Journal that he still advised caution about regional bank bonds given the uncertain outlook for commercial real estate, Thanos Bardas of Neuberger Berman said that he added more TIPS to his portfolio as he expects bank fears to ease, adding that demand for Treasurys will likely decline once investors realize “that the banking system is in great shape.”