Global insurers overseeing a whopping $29 trillion in assets have expressed their worries about the banking sector. A survey conducted by BlackRock Inc., the world’s largest asset manager, reveals that insurers see banks as the greatest area of concern.
In the survey of 378 executives conducted from June to July, 56% of respondents identified banks as the most likely place for “further financial cracks” to emerge. Following closely behind were alternative funds and residential real estate.
Impact of Treasury Yields
It is worth noting that these concerns were expressed before the recent surge in Treasury yields. The abrupt increase in 2-year, 10-year, and 30-year rates to their highest levels since 2006, 2007, and 2011 respectively, over just the past week, adds another layer of uncertainty to the banking sector.
Rise in Yields: Impact on Financial Markets
Unexpectedly stubborn inflation, along with the Federal Reserve’s commitment to higher interest rates for a longer duration, is causing yields to reach multiyear highs. This trend is leading to several losers in financial markets, particularly banks that hold U.S. government debt as part of their liquid assets.
Banks Bear the Brunt
Banks, including California’s Silicon Valley Bank and First Republic Bank, face the brunt of rising yields as prices of underlying securities fall. The decline in prices negatively affects the value of Treasuries held in their balance sheets. Ben Emons, Senior Portfolio Manager and Head of Fixed Income at NewEdge Wealth in New York, highlights the vulnerability of banks to rising rates due to the Treasuries they hold.
Active Managers at Risk
Following banks, active managers of fixed income are also vulnerable to the impact of rising yields. The performance of their portfolios is challenged, potentially leading to outflows from clients.
BlackRock Survey Findings
BlackRock recently conducted a survey that captures market sentiment. Notably, this survey doesn’t account for the months of August and September, which likely witnessed further deterioration for banks and existing holders of Treasuries due to a continued rise in bond yields. Analysts, like Bruno Braizinha at BofA Securities, even predict a potential push towards a 5% benchmark 10-year yield in the near future.
Insurers: Persistent Inflation and Potential Recession
The survey reveals that insurers have identified persistent inflation and the threat of recession as their primary concerns. As a result, 92% of respondents plan to maintain or increase their allocations to public fixed income. Furthermore, within this group, 51% intend to increase their allocations specifically through government and agency bonds in the next 12-24 months.
Insurers’ Focus on Quality
Insurers show a bias towards quality in private markets, with almost 90% planning to boost their allocations to these markets over the next two years.
In summary, the rise in yields is having a significant impact on financial markets, with banks and active managers of fixed income facing significant challenges. Insurers, on the other hand, are actively adjusting their investment strategies to hedge against inflation and recessionary risks, focusing on quality assets in both public and private markets.
Treasury Yields Pause After Aggressive Rise
The relentless surge in Treasury yields witnessed over the past week seemed to take a break on Wednesday morning. Yields across various maturities, ranging from one month to thirty years, remained relatively stable. However, amidst this reprieve, all three key U.S. stock indexes—DJIA, SPX, and COMP—experienced a decline.