Why the flattening yield curve is bad, and what it means for banks

The U.S. Treasury yield curve is flattening to levels not seen since the deflationary shock at the onset of the COVID-19 pandemic. This comes as the Federal Reserve is expected to hike the policy rate to above neutral to tame inflationary pressures. A flattening or inverting yield curve tends to hinder banks’ net interest margins since they can only borrow money at higher rates and lend at lower rates. Bank stocks (KBE) have been underperforming the stock market (SP500) since the yield curve first started its cyclical decline in mid-March 2021, looking at the chart here. Bank of America analyst Ebrahim Poonawala wrote in a note to clients Wednesday: ‘This is likely to challenge bank stock outperformance’ . . .