On October 3, the 10-year Treasury yield rose 5 basis points to 4.848%, hitting a 16-year high; on October 4, the 30-year Treasury yield climbed to 5%, the first time since 2007. As of press time, the 10-year Treasury yield fell back to 4.732%, and the 30-year Treasury yield dropped to 4.909%.

After going through some turbulence following the collapse of Silicon Valley Bank in March, the U.S. banking industry experienced a degree of stability. However, with Treasury yields continuing to rise, regional banks in the U.S. may find themselves in a state of panic again. Bond yields surge, bond values fall, and the banking industry will face new pressure.

The banking system’s balance sheet is the first to bear the brunt, according to data from the Federal Deposit Insurance Corporation, as of June 30, the U.S. banking industry had unrealized losses of $558 billion on its investment securities. According to the National Bureau of Economic Research, from the first quarter of 2022 to the first quarter of 2023, a year in which interest rates rose, the U.S. banking system’s bond portfolio suffered losses of $2.2 trillion at market prices.

In addition, rising interest rates pose a potential wave of defaults on commercial real estate loans, which is especially worrisome for regional banks that have nearly 20% of their balance sheets in commercial real estate loans.

On September 29, renowned investor Kevin O’Leary said in an interview with Fox that the commercial real estate dilemma could lead to bank failures. Rising interest rates increase borrowing costs, which lower the value of commercial real estate, putting pressure on debt-dependent real estate developers, and banks are increasingly reluctant to lend to them, exacerbating credit tightening.

According to a previous report by Bloomberg, Priya Misra, head of global interest rate research at TD Securities, also believes that if banks start to have balance sheet problems, they may reduce their lending size, increase their lending costs, and ultimately trigger a credit crunch. She said, “We have opened Pandora’s box.”

Editor: Alexander