Bond yields continue to soar, damaging interest rate-sensitive sectors of the economy.
I recently wrote that rising yields are killing homebuilder stocks because mortgage rates are linked to the 10-year Treasury yield, which this week hit 5.31%, 1.15 percentage points above where it stood at the beginning of 2026. That’s very bad news for a housing market that was already suffering from affordability issues.
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Well, misery loves company, and homebuilders are not alone. Bank stocks have also tanked over the past month due to rising yields and the prospect of multiple interest rate hikes by the Federal Reserve.
The KBW Nasdaq Bank index is down 9.7% over the past month, while the broader market, as measured by the S&P 500 index, is up about 1.5%. The KBW Index tracks 24 U.S. banking stocks, including large national money centers, regional banks, and thrifts.
Some of the hardest hit banks include Bank of America (NYSE: BAC), down 13.3% over the past month, Bank of New York Mellon (NYSE: BNY), down 12.2%, Goldman Sachs (NYSE: GS), down 13.1%, Morgan Stanley (NYSE: MS), down 11.7%, Charles Schwab (NYSE: SCHW), down 10.2%, and PNC Financial Services Group (NYSE: PNC), down 10.1%.
In fact, bank stocks had the worst September compared to the S&P 500 since 1990.
When yields and interest rates rise, bank profits are squeezed for multiple reasons. Banks’ net interest margins, the difference between what they lend at and what they pay on deposits, shrink. Plus, as bond yields rise, deposit accounts face growing competition from Treasury bills, so banks eventually have to pay more for their main funding source.
Also, rising interest rates depress demand for bank loans, such as mortgages and consumer loans. And rapidly rising rates can slow dealmaking and trading activity on Wall Street. Indeed, mergers and acquisitions in North America fell 23% in the third quarter.
Finally, the sell-off in bonds, which has pushed yields higher, can decrease the value of a bank’s bond portfolio. Eventually, of course, banks will rebuild their portfolios at higher yields, which can boost earnings in the longer run. But if yields continue to rise, as they have in recent weeks, rebuilding will take longer, and there will need to be more deposit repricing.
