Regional banks face rising Treasury yields

(Bloomberg) -- U.S. Treasury yields have been trending higher since late last year, with the risk of commercial real estate distress once again putting pressure on regional banks’ balance sheets.

Most read from Bloomberg

Stock markets have already reacted to rising borrowing costs. Small bank stocks have fallen about 8.2% since 10-year Treasury yields began rising in late November. When credit costs rise, so does the risk of default for borrowers who purchased office buildings before the pandemic sent values tumbling.

"Rising long-term yields will certainly make the banking system more vulnerable in the short term, even if the base economic scenario is more profitable," said Steven Kelly, deputy director of research at Yale University's Financial Stability Project.

FDIC Chairman Martin Gruenberg said in a December report that last year's surge in 10-year Treasury yields likely reversed the third-quarter decline in bank availability for sale and holdings to Futures securities experience most of the downward trend in unrealized losses. 12 Speech. The benchmark rate rose about 0.3 percentage point to around 4.58% after last week's rise even after better-than-expected inflation data, adding to the pain for lenders.

If lending benchmarks remain high, regional banks will face higher losses in commercial real estate because borrowers will have difficulty refinancing, said Tomasz Piskorski, a professor of finance and real estate at Columbia Business School. He and other researchers estimate that about 14% of the $3 trillion in U.S. CRE loans are underwater, rising to 44% for office loans.

Click here to listen to the Credit Edge Podcast

Smaller lenders require borrowers to make lower down payments than larger lenders before rate hikes begin in 2022, making them more vulnerable to commercial property defaults. Now that office and multifamily housing values have plummeted, lenders have less buffer before absorbing losses.

PNC Financial Services Group CEO Bill Demchak said on an earnings call this week that the office market has not yet stabilized, "and that's why we remain concerned and have reservations." The bank increased provisions to cover bad office loans to 13.3%, up from 8.7% at the end of 2023, although this represents only a small part of its total book.

On the bright side, lower deposit costs help stabilize due to lower federal funds rates. Steady deposit flows in the fourth quarter suggest there is a low likelihood they will be transferred to other banks soon, reducing the risk that lenders will have to sell underwater bonds. Duration risk decreases as the security approaches maturity.

For now, "investors are less worried about unrealized losses because it doesn't look like they will be forced to sell like Silicon Valley banks," said Scott Hildenbrand, head of deposit fixed income at Piper Sandler.

Terry McEvoy, a bank analyst at Stephens Inc., agrees. He said the company had met with at least 30 bank investors in recent days and that it was not a major area of discussion or concern. Columbia Business School's Piskoski said the incoming Trump administration may also boost bank profit margins through loosening regulations.

Still, with lending benchmarks still trending higher even as the Fed cuts rates, "we are entering a very precarious situation" and "rather than moving away from this area of bank vulnerability, we are moving toward an area of increasing bank vulnerability." ," Piskoski said. .

Week in review

Six of the largest U.S. banks issued corporate bonds or preferred shares this week after reporting results. Issuance is likely to increase in the coming sessions as yields fall as inflation reports suggest price rises may be contained.
Trading corporate bonds has never been cheaper, thanks to the boom in electronic trading, which allows a wider range of investors to buy and sell large volumes of securities faster and more efficiently.
The first loan to fund a leveraged buyout this year arrived Thursday, as JPMorgan Chase & Co. backed Silver Lake Management's acquisition of Endeavor Group Holdings Inc., the talent agency and controlling investor in WWE and the Ultimate Fighting Championship.
Vanke has rebounded from historic lows in credit markets, with people familiar with the matter saying the troubled developer had previously told some creditors it had enough cash ready to repay local notes.
The recurrence of corporate bankruptcies in the United States is increasing at the fastest rate since 2020, and some companies are still unable to recover even if they reduce their debts.
Software maker Databricks Inc. has secured more than $5 billion in financing from lenders including Blackstone Inc., Apollo Global Management Inc. and Blue Owl Capital Inc., its largest debt financing to date.
At least eight major Chinese companies, including a unit of China Evergrande Group, will defend themselves in debt-related court cases over the next two weeks, the busiest period ever for such hearings one.
Blackstone's flagship private credit fund withdrew $500 million of investment-grade bonds it planned to price on Tuesday due to administrative delays.
Goldman Sachs Group Inc. pulled out of a $1 billion deal to help refinance Ecuador's debt due to internal risk management controls.
Altice France's creditors are demanding the return of shuffled assets and a say in future board appointments as part of negotiations with the company over 23.7 billion euros ($24.4 billion) of debt.
Prospect Medical Holdings Inc., once an aggressive buyer of cash-strapped hospitals, filed for bankruptcy after struggling with piling debt and soaring costs.

on the move

Paul Goldschmid was one of the longest-tenured partners at King Street Capital Management before leaving the $26 billion hedge fund firm last year. He announced the launch of his own long/short credit firm, Harvey Capital Partners, on LinkedIn.
Goldman Sachs Group Inc. promoted several key executives and merged teams to form a capital solutions group, a move that recognizes the growing importance of private markets. Pete Lyon, global head of the Financial Institutions Group and Financial and Strategic Investors Group, and Mahesh Saireddy, global head of mortgages and structured products, will lead the new group.
Lloyds Bank has appointed James Brown as managing director, head of leveraged finance and project finance syndicate. Brown heads the leveraged debt capital markets business in London for five years before joining Mizuho Bank in London.
Ares Management Corp. promoted financial industry veteran Kevin Alexander to co-head of alternative credit. He will work alongside current co-directors Keith Ashton and Joel Holsinger.
Banco Bilbao Vizcaya Argentaria SA has hired Estanislao Fidelholtz, head of Americas structured credit and sustainable credit products at UBS Group AG, as managing director and head of the U.S. Credit Solutions Structured team.
Man Group has consolidated its European and US CLO groups into a global syndicated loan business. Portfolio managers Joshua Cringle and Jonathan Newman will lead the new platform from the US, which has the ability to issue CLOs.
Credit investor SC Lowy Financial HK Ltd. has laid off several employees as it shifts from trading public securities to private credit, its chief executive said.

--With assistance from Greg Ritchie and Rheaa Rao.