Investors See Buying Opportunity in Banking Sector After Recent Turmoil

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Investors See Buying Opportunity in Banking Sector After Recent Turmoil

A growing number of investors are placing their bets on the banking sector, believing that regional lenders are in better condition than feared after the collapse of Silicon Valley Bank. Bank shares rallied on Monday, while US Treasury prices fell, after First Citizens Bancshares reached a deal with federal regulators to buy large pieces of Silicon Valley Bank. This has resulted in Wall Street showing increasing signs of optimism regarding banks, with their stocks and bonds stabilising and analysts becoming increasingly bold to call bottom on the selloff. Although recent Federal Reserve data has shown a significant shift in deposits from smaller to larger banks, investors believe that there is no fundamental, widespread problem on the asset side of bank balance sheets.

The recent fears about the banking sector have not hit all markets equally, with the S&P 500 being roughly unchanged since the collapse of Silicon Valley Bank. Nevertheless, U.S. government bonds have staged one of their biggest rallies of recent decades, reflecting investor bets that the banking problems will slow economic growth and likely force the Fed to pivot from fighting inflation to slashing interest rates. The declines in the stocks and bonds of banks have also been severe, with the KBW Nasdaq Bank Index of commercial lenders still down 23% since March 8, even after climbing 2.6% on Monday.

Some analysts argue that bonds may have an easier time recovering because all that matters for debt investors is that banks remain solvent and capable of making their debt payments. Bank shares, by contrast, could be dragged down by lowered earnings expectations, as investors weigh the threat of more stringent regulations and pressure to increase deposit rates. In a threat to both bonds and stocks, investors have recently become much more worried about banks’ exposure to commercial mortgages, the value of which has been threatened both by rising interest rates and a shift to hybrid work arrangements.

While some investors are still cautious about buying regional bank bonds, others are feeling more confident. Thanos Bardas, global co-head of investment-grade fixed income at Neuberger Berman, recently reduced exposure to short-term Treasurys and added Treasury inflation-protected securities, believing that easing bank worries will spur a rebound in investor confidence. In the end, only time will tell whether investors’ confidence in the banking sector is misplaced or justified, but for now, a growing number of investors believe that there is a ‘once-in-a-decade’ buying opportunity.

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