(The author is a Reuters Breakingviews columnist. The
opinions expressed are her own.)
By Swaha Pattanaik
LONDON, Sept 10 (Reuters Breakingviews) - When longer-term
interest rates creep up, that’s usually a cue for banks to rake
in bigger profits by borrowing much more cheaply than they lend.
Regulation and the economic environment complicate the equation
Banks fund their mainly long-term lending – like mortgages –
with short-term borrowings, for instance on the interbank
lending market. Recent movements in the sovereign bond market,
which is the starting point for what banks charge, should help
them. The spread between British two- and 10-year bond yields
has nearly doubled since May 1. It has risen by three quarters
in the United States and by more than half in Germany.
Central banks’ promises to keep interest rates low are
tethering short-term market interest rates. Longer-dated yields
are freer to rise as growth picks up and traders anticipate the
end of easy money policies. Hence the so-called yield curve,
which plots rates as maturities increase, is getting steeper.
However, banks may not be able to benefit as much as in the
past. Regulation has changed the rules of the game. National
policymakers are keeping a much closer eye on how well banks
match up their assets and liabilities. As a result, banks are
now less likely to borrow heavily in the short-term wholesale
funding market in order to make longer-term loans.
Demand for credit may be the other constraining factor. In
the past, core yield curves have typically steepened to these
levels because of the strength of economic activity. This time,
at least part of the curve steepening is due to central banks’
current unusual policy stance. For example, between 1990 and
2005, the U.S. economy was growing twice as fast, or more, when
the spread between two- and 10-year Treasury yields was this
wide. Households and firms may not therefore have the same
ability to absorb sharp increases in borrowing costs.
Of course, some banks will find current yield curve trends
helpful and this is likely to be factored into share prices. But
the financial world may have changed too much for investors to
bank on these relationships to the extent they did in the past.
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS:
- In the United States, the 2/10-year government bond yield
spread has widened to 246 basis points from 141 basis points at
the beginning of May.
- In Germany, it has risen to 173 basis points from 110
- In Britain, it has grown to 243 basis points from 133
- Reuters: Low rate pledge buys time but builds risk for
fragile banks [ID:nL6N0FI1IN]
(Editing by Chris Hughes and Viktoria Dendrinou)
Keywords: BREAKINGVIEWS YIELD CURVE/BANKS/
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