Marketbites: Regional Banks Face Risky Real Estate Exposure
Portfolio Manager Commentary:
Stocks sold off Wednesday, continuing the sluggish start to September, as concerns mounted that the Federal Reserve may not be done hiking interest rates. Treasury yields jumped, weighing on risk assets again. The yield on the 2-year Treasury note was last up about 6 basis points and trading above the 5% level.
Pressured by rates, technology stocks underperformed, with the tech-heavy Nasdaq notching a third straight day of losses. The biggest laggards included Nvidia and Apple, dropping more than 3% each. Along with Apple, Amgen and Boeing fell about 2% each, weighing on the Dow.
Wednesday’s rise in Treasury yields coincided with stronger-than-expected economic data that fueled some concern over the likelihood of further hikes. Recent readings on both the services and manufacturing sectors of the U.S. economy show that prices are moving in the wrong direction.
Elsewhere, the latest Beige Book from the Fed indicated that the U.S. economy saw modest growth from in July and August, and slowing price growth. Earlier in the day, Boston Fed President Susan Collins said the central bank can “proceed cautiously” on more rate hikes, but indicated that “further tightening would be warranted” depending on the data.
Chart of the Day:
Regional banks across the country have followed a similar playbook, gorging on commercial real-estate loans and related investments in big cities over the past decade. With the commercial real-estate market now in meltdown, those trillions of dollars in loans and investments are a looming threat for the banking industry—and potentially the broader economy. Regional banks’ exposure is even bigger than commonly reported. The banks are in danger of setting off a doom-loop scenario where losses on the loans trigger banks to cut lending, which leads to further drops in property prices and yet more losses.
Today’s troubled market, fueled by rising interest rates and high vacancies, follows years of boom times. Banks roughly doubled their lending to landlords from 2015 to 2022, to $2.2 trillion. Small and medium-size banks originated many of those loans, and all that lending helped push up property prices.
What else is happening:
The best colleges in America - read here
Apple tests limits for most expensive iPhones - read here
Where to put your cash now for every income level - read here