By Telis Demos

Bank stocks were hit hard last week by the potential fallout from tariffs on credit risk and interest rates. By midday Monday, though, lenders were helping to lead the market's attempt at a rally.

The KBW Nasdaq Index was up more than 1% Monday afternoon. Bank of America was the top gainer among the largest global U.S. banks, up more than 3.%. The S&P 500 was about flat at that point of the session.

It wasn't exactly clear what investors were focusing on. And given how reactive markets are to every trickle of news about tariff policy, it all may unwind quickly.

But rising yields might have something to do with it. Ten-year U.S. Treasury yields were up 0.14 percentage point, and one-year Treasury bills were up 0.04 point.

A surge in Treasury yields can help bolster what banks earn on their lending. That is the case for Bank of America, which has a significant amount of older, lower-yield bonds maturing each quarter-and reinvesting them at higher yields today boosts the bank's net interest income. The steady maturing of the bank's portfolio also reduces the hit to capital when the value of older bonds tumble as yields rise.

On the flip side, Bank of America tends to have relatively cheap deposits, due to its big footprint of day-to-day consumer checking accounts. That money tends to be less reactive to higher yields available elsewhere in cash, unlike, say, banks with lots of deposits from wealth-management accounts.

Bank of America also tends to have relatively less credit risk than its peers in a recessionary environment, at least as judged by the annual results of the Federal Reserve's stress tests. Corporate credit risk, as measured by a benchmark spread of corporate bond yields to Treasurys, was as of Friday at its highest level since 2023, according to ICE BofA index data tracked by the Federal Reserve.

Analysts at KBW also recently noted that Bank of America shares were, as of the end of March, among the "cheapest" of the global, systemically important U.S. banks, trading at just over 9 times 2026 expected earnings.

So if investors are betting on a "stagflation" scenario - of slower growth and and higher inflation that elevates rates - Bank of America may net out ahead.

Of course, that could all change in a flash.

This item is part of a Wall Street Journal live coverage event. The full stream can be found by searching P/WSJL (WSJ Live Coverage).

(END) Dow Jones Newswires

April 07, 2025 14:50 ET (18:50 GMT)

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