While higher interest rates can juice profits for a slew of lenders, a senior TD Securities strategist warns that the relentless jump in borrowing costs threatens to create fresh problems for the banking sector.
The yield on two-year Treasuries rising to 5% this week represents the “pain trade for a lot of the banks” heading into the fall, said Gennadiy Goldberg, TD’s head of US rates strategy, in a Tuesday interview on Bloomberg Television.
The banking crisis this spring exemplified the risk of higher-than-expected rates. The demise of SVB Financial Group came about in large part because its balance sheet was burdened by long-term loans whose value plummeted as yields rose on the back of Federal Reserve interest-rate hikes. “At what point does the economy effectively break under the weight of real rates? I don’t think we are there yet,” he added. “But I still think that the market is ignoring a lot of this interest-rate pass through at their own peril.”
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