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The US 10-year yield at 5.31% is pushing up European bond yields, with France most exposed. US regional banks such as Citizens, Zions and Huntington could earn more from higher long-term rates. Citigroup, with large European markets operations, could be hurt. Investors still see the regionals as rate victims.
Source: Bloomberg ↗
Investors tend to treat every bank as a loser when US yields rise, because the bonds banks hold lose value. US regional banks lend mostly at home and do little business in Europe. With the 10-year yield at 5.31%, their loans earn more, while deposit costs rise more slowly. That widens their net interest margin, the gap between loan income and deposit costs. Citizens Financial Group (CFG), Zions Bancorporation (ZION) and Huntington Bancshares (HBAN) fit this profile. The damage falls instead on big US banks with large European markets arms, such as Citigroup (C). Higher US yields are pushing French government bond yields further above German ones, made worse by France's weak finances. That can cut underwriting fees, weaken collateral and raise the cost of the dollars these banks lend to European banks. Funding markets already show the strain.
Investors broadly believe rising rates are bad for every bank stock. The bonds banks hold lose value on paper, the pattern that sank SVB. They also expect stress in Europe to make the Fed slow its rate increases eventually, which would bring relief across the sector.
Why that may be wrong
Investors are stretching the lesson of the 2023 regional bank crisis around SVB onto a very different rate setting. In 2023, regional banks were hurt because their bonds ran much longer than their deposits. By 2026, many mid-sized regional banks have reworked those bond holdings. So investors use the wrong template, 2023's deposit flight, when 1994-1995, a time of widening lending margins, fits better. Analysts' models also keep the net interest margin fixed. They miss that deposit costs rise more slowly than loan yields, which lifts margins for a while.
This link breaks if the French bond stress turns into a wider European banking crisis that freezes dollar funding. In 2011, US money-market funds pulled back from European bank debt, and dollars became scarce. A repeat would set off a global flight from risk that hits every financial stock, US regional banks included. One gauge is the 3-month euro-dollar cross-currency basis swap, which shows the extra cost of borrowing dollars against euros. A move beyond -50 basis points would signal severe dollar funding stress. Then the regional banks would likely fall with everyone else.
US regional banks still hold bonds with paper losses from the 2021-2022 rate jump. A 5.31% 10-year yield deepens those losses, and if confidence slips, depositors could leave, as in 2023. The weakest assumption here is that banks can keep deposit rates low. Money-market funds paying high yields could pull deposits away, and then the margin gain disappears. Watch the Fed's weekly H.8 report on bank balance sheets. If deposits at mid-sized regional banks fall more than 2% in a month, higher funding costs would outweigh any margin gain, and the regionals could fall instead of rise.
The 1994 bond crash is the closest match. The Fed raised rates fast, US yields jumped, and the damage spread to European bond markets, France included. Over the next 6 months, US regional banks focused on home lending did better than the big money-center banks, as wider lending margins offset worries about bad loans. In 2022, as the 10-year yield rose from 1.5% to 4.2%, regional banks' net interest margins, the gap between loan income and deposit costs, widened by 80-100 basis points on average. Financial firms exposed to Europe lagged, as the European Central Bank and the Fed moved apart and dollar funding got harder. Banks that lend at home tend to gain when long-term rates rise faster than short-term ones. Banks tied into global markets end up absorbing the stress they help spread.
A 5.31% US 10-year yield pushes European government bond yields up. France already has heavy debt relative to its economy and an unstable government. Its bond yields rise furthest above Germany's.
As the gap between French and German yields widens, European capital markets tighten. Big US banks that underwrite European government and company debt earn lower fees and get less credit for the collateral they hold. The European Central Bank faces a hard choice. Cutting rates would support growth but weaken the euro and bring in more US yield pressure. Holding would deepen the risk of recession. Either way, US banks with large European businesses lose.
US regional banks that lend at home gain the most and get the least attention. With the 10-year at 5.31% and deposit costs lagging, well-placed regionals could see net interest margins widen by 60-90 basis points over the next 2-3 quarters. Investors are selling them alongside the big banks anyway. So regional banks with US-only operations and a focus on business loans may be valued too low. Big US banks with large European investment banking revenue face both the spread stress and a capital markets slowdown.
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