Investors in the stock market appear to be overlooking recession risks due to higher rates and banking stress, says Well Fargo Investment Institute.
Investors in U.S. stocks appear to be playing down the risks of sharply higher interest rates for the banking system and economy, despite the past two months ushering in three of the four largest bank failures in American history, according to the Wells Fargo Investment Institute.
Following its takeover by regulators, most of First Republic Bank’s FRC assets were auctioned off early Monday to JP Morgan Chase & Co. JPM , marking the third, large regional U.S. bank to fail since mid-March. Here’s why in a nutshell: “The dramatic 2020 decline in interest rates, to 15-year lows, encouraged a flood of bank deposits ,” he said. Banks used the roughly $5 trillion influx in deposits to make low-coupon mortgages and to invest in long-term bonds.
$5 trillion loss? Low-coupon securities snapped up by banks, insurance companies and other asset managers during the pandemic might not pose a huge credit risk to investors, like the toxic subprime mortgages and related derivatives that flourished in the run-up to the 2008 global financial crisis.But the pain of sharply higher rates still can pack a punch.
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