The potential for more cracks to emerge in the banking sector is seen as the greatest area of concern for global insurers overseeing $29 trillion in assets.
Insurers identified banks as the top worry in a survey of 378 executives taken from June to July by New York-based BlackRock Inc.
BLK,
the world’s largest asset manager.
Among respondents, 56% said banks are where “further financial cracks” are most likely to happen, followed by alternative funds and residential real estate. And this was before the recent runup in Treasury yields, which sent 2-
BX:TMUBMUSD02Y,
10-
BX:TMUBMUSD10Y
and 30-year rates
BX:TMUBMUSD30Y
to their highest levels since 2006, 2007 and 2011 in just the past week.
Unexpectedly stubborn inflation coupled with a resolute Federal Reserve focused on keeping interest rates higher-for-longer is pushing yields to multiyear highs, while creating many losers in financial markets. Those losers tend to include banks because they often hold U.S. government debt as part of their liquid assets. Banks and other existing holders of Treasurys get hit hardest by rising yields as prices fall on the underlying securities, as was the case earlier this year at California’s Silicon Valley Bank and First Republic Bank.
“Banks are most vulnerable to rising rates because of the Treasurys they hold on their balance sheet,” said Ben Emons, senior portfolio manager and head of fixed income at NewEdge Wealth in New York. “The next vulnerable group are the active managers of fixed income, which see the performance of their portfolios challenged and can see potential outflows by clients.”
The survey by BlackRock, released on Wednesday, doesn’t capture the months of August and September, when a continued rise in bond yields likely only worsened things for banks and other existing holders of Treasurys. Now, analysts like Bruno Braizinha at BofA Securities are talking about the potential factors that might even send the benchmark 10-year yield toward 5% in the near term.
Insurers identified persistent inflation and the threat of recession as big concerns in BlackRock’s survey, and 92% of respondents said they are planning to maintain or increase their allocations to public fixed income. Within this group, 51% intend to increase their allocations through government and agency bonds in the next 12-24 months.
Meanwhile, insurers are also biased toward quality in private markets. Almost 90% plan to boost their allocations to private markets over the next two years.
The aggressive rise in Treasury yields resumed on Wednesday, sending the entire yield curve toward or further above 5%. The 10- BX:TMUBMUSD10Y and 30-year yields BX:TMUBMUSD30Y respectively jumped to 4.625% and 4.731%, ending at their highest closing levels since Oct. 16, 2007, and Feb. 10, 2011.
Meanwhile, U.S. stocks
DJIA
SPX
COMP
took back earlier losses to finish mostly higher.
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