Stock market: the spectre of government bonds looms over EU banks, which have lost 7 per cent in a month
Spreads are weighing on financial institutions in Italia, France and Spain
(Il Sole 24 Ore Radiocor) - In less than a month, European banks have ‘burned through’ over 7 per cent of their market capitalisation, crashing – after a 2026 of continuous rises – into the wall of government bond yields, from Italian BTps to French OATs, via Gilts and Bonos. All are now sky-high. This is the atmosphere that has prevailed in trading rooms for the past few sessions, with Milan and Madrid leading the way (where the weighting of banks on their respective indices is greater than on other markets). The trend is global: yesterday, for example, UK banks saw a sharp fall, whilst on Wall Street the benchmark banking index has lost 14 per cent since mid-August. Things are no better on the Old Continent, where the Stoxx Europe 600 sub-index has fallen by over 7 per cent from its peak in early September. It has been just over three turbulent weeks for bank share prices, as evidenced by yet more losses in today’s trading session on the FTSE MIB, ranging from UniCredit (-0.9%) to Intesa Sanpaolo (-0.8%), including BPER (-1%) and Banco BPM (-0.8%).
What is causing concern is the record-high bond yields, which are leading to a sort of (temporary) flight from the banks. The reason for this may seem counterintuitive, given that, in theory, a rise in market rates boosts net interest margins, but analysts are in no doubt: ‘The fall in bank shares in Milan and Madrid is down to the surge in bond yields. Peripheral banks hold a lot of government bonds, so the rise in rates devalues their portfolios,’ explains an analyst to Radiocor, adding another source of tension: “The fear that the rise in the cost of debt will slow down the real economy, prompting investors to reduce their exposure to cyclical sectors.”
On this point, market experts are unanimous: ‘When the yield on government bonds rises and the country risk premium increases, financial securities are hit the hardest. And so, given that this is the asset class with the greatest ‘weighting’ in portfolios, profits are taken,” that is, investors are offloading bank shares, explains another broker, noting that so far credit institutions have paid out coupons in abundance. In a nutshell, as a long-standing observer of the Milan Stock Exchange puts it, banks are being weighed down by ‘the widening of the spread’.
However, concerns are widespread and relate to the financial stability of EU Member States. According to one analyst, the banking sector is suffering because the market is interpreting the surge in bond yields as a ‘macroeconomic shock’ and a ‘credit risk’. Paris, for example, is under scrutiny as the France-Germany spread is at a 14-year high due to concerns over France’s public finances. And given that banks, in general, hold huge quantities of government bonds on their balance sheets, an increase in sovereign risk tends to raise both the cost of funding and the perceived credit risk of the banks. In short, when yields rise too high, investors begin to worry about weaker demand for credit and an increased risk of corporate default. As you can see, there’s a bit of everything involved, and the banks remain in the firing line.
