Rising long-term rates hurt many, but help banks

Rising long-term interest rates are generally a bad thing for corporate America, because they lift companies’ borrowing costs. 

But it’s a different story for banks. They can do well amid climbing long-term rates, as they make money on the spread between short-term rates and long-term rates. Banks borrow at short-term rates and earn revenue at long-term rates. 

The short-term borrowing comes from customer deposits and interbank loans. And the long-term revenue comes from loans and bonds. So bank revenue increases when long-term bond yields rise and short-term rates fall or rise by less than long-term yields.

That’s good for bank stocks, as you might expect. Ten-year Treasury yields and the KBW Nasdaq Bank Index have moved in sync for decades (see chart below: the Bank Index is in pink).

The premium is climbing

Now is a time when the premium of long-term rates over short-term rates is rising. The spread of 10-year Treasury yields over three-month yields increased from negative 1.5 percentage points last Aug. 2 to positive 0.15 point last Friday.

This has pushed many banks’ net interest income higher. That number is the interest income banks earn on their assets, such as loans, minus their interest payments on liabilities, such as customer deposits. The metric is rising for major banks. For example, JPMorgan Chase (NYSE: JPM) posted net interest income of $23.4 billion in the first quarter, up 1% from a year earlier.

To be sure, rising net income doesn’t necessarily lead to a booming stock price. The KBW Bank Index has gained just 0.2% this year, barely beating the S&P 500, which is unchanged. 

Net interest income is only one factor affecting a bank’s performance. At present, analysts and banks are concerned that banks will suffer from a weakening economy and stubborn inflation, as tariffs assert themselves. 

So rising long-term rates are generally good for banks, but they don’t guarantee that banks’ overall earnings and stock price will rise.