The danger of rates rising for longer after the latest inflation reading increases the “downside risk” for regional banks, according to Bank of America. Rate cut expectations moved to the end of the year after a higher-than-expected January consumer price index raised concerns that the Federal Reserve's path toward its 2% inflation target could be bumpy. According to the CME FedWatch tool, markets are now assigning a higher probability that an easing cycle will begin in May or June, rather than March. At the same time, the 10-year Treasury yield surpassed 4.3% on Tuesday, a level it last reached in December. On Wednesday it fell slightly to 4.25%. US10Y 1Y mountain US 10-year Treasury For regional banks, a rise in bond yields is especially risky as institutions would have to book losses on their Treasury holdings, an event that led to the bankruptcy of Silicon Valley Bank in Last March. “Less frequent and subsequent Fed rate cuts pose a downside risk to bank stocks,” analyst Ebrahim Poonawala wrote in a Tuesday note. “We are especially concerned about the broader market's failure to project the path of interest rates, a consistent theme since the Federal Reserve began raising interest rates in March 2022.” “We are concerned about the risk of no rate cuts in 2024 and a much higher level of interest rates across the entire Treasury yield curve,” Poonawala added. The SPDR S&P Regional Banking ETF (KRE) ended Tuesday's session down 4.2% and has fallen more than 10% this year. KRE YTD mountain SPDR S&P Regional Banking ETF “Essentially, it has the potential to lead to a worse than expected credit cycle, reduce net interest margins (=downside risk to EPS outlook), while putting pressure on capital levels due to [mark-to-market] losses on bonds,” Poonawala wrote. The net interest margin is the difference between the interest banks earn on loans and pay on deposits. Meanwhile, market value bond losses are generated when the current value of an asset is less than the The institution paid to acquire them. Instead, the analyst said he prefers larger capitalization banks with less exposure to commercial real estate, such as JPMorgan, Goldman Sachs and BNY Mellon. In the regional sector, the firm said it prefers Truist, US Bancorp and First Bancorp. (Puerto Rico), among others.—CNBC's Michael Bloom contributed to this report.
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