Bond Selloff Adds to the Pressure on Regional Banks
Investors are demanding higher yields to own the bonds of regional banks, threatening to further pressure lenders that are already being hit by rising deposit costs.
The extra yield, or spread, on regional-bank bonds over U.S. Treasurys has risen in many cases by about 2 percentage points or more since early March, when the failures of Silicon Valley Bank and Signature Bank spurred a broad investor retreat from all but the largest U.S. banks.
The spread widening is based on a sampling of actively traded bonds of lenders with about $150 billion to $220 billion of assets, such as Columbus, Ohio-based Huntington Bancshares and Buffalo, N.Y.-based M&T Bank. Banks in that group are small enough that concerns have emerged about their health but still large enough to have significant amounts of bonds outstanding.
By contrast, the spread on 10-year JPMorgan Chase bonds increased by only around 0.1 percentage point over that span, according to MarketAxess, reflecting in part the firm’s financial strength and the perception that the U.S. wouldn’t allow a bank so large to fail.
After the bank failures in March, federal regulators have signaled that they eventually could force banks with as little as $100 billion in assets to issue more long-term bonds, subjecting them to similar requirements as the giant banks now deemed systemically important.
The purpose of such rules is to create a buffer of debt that can be converted into equity if a bank becomes insolvent, reducing the need for taxpayer-funded bailouts. But the impact for regional banks could be selling bonds into a market that isn’t eager to purchase them.
“Spreads are wider, so funding costs are up, rates are up, and they need to raise more of this stuff," said Andrew
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