We've seen a clear trend when it comes to ASX bank shares on the share market this week. And it's not a good one.
ASX 200 banks have had a horrid week, no way around it. Take the Commonwealth Bank of Australia (ASX: CBA) share price.
CBA shares closed at $101.42 each on Wednesday afternoon. But today, those same shares are trading at $98.71 at present. That's down almost 3% in two days.
National Australia Bank Ltd (ASX: NAB) shares have fallen by a similar amount over the same period, while Westpac Banking Corp (ASX: WBC) shares and ANZ Group Holdings Ltd (ASX: ANZ) shares have performed slightly better.
These falls for ASX banking shares come at the same time that we are seeing a surge in global bond yields. It was only late last month that we were reporting a surge in bond yields, with the 10-year US treasury bond yield surpassing 4.5% at the time.
Well, those same bonds just hit a 5% yield overnight. This is the first time we've seen the 10-year Treasury with a 5% yield since 2007.
Now, on one hand, these rises in bond yields could be construed as a positive for banks. High bond yields mean that banks can lend money out at higher rates, since bond yields affect other interest rates in the global economy. High bond yields also increase the appeal of cash investments like term deposits and savings accounts. That's at the expense of riskier assets like shares and property.
So if rising yields are good news for ASX banks, why are bank shares taking such a pounding this week?
Why are ASX bank shares falling amid rising bond yields?
Well, there could be some other issues at play. According to reporting in the Australian Financial Review (AFR) today, the Reserve Bank of Australia (RBA) is dealing with a massive financial loss this year Thanks to the bank's quantitative easing (QE) policies that were employed to get Australia through the COVID-19 pandemic, the RBA still holds billions of dollars worth of low-yield bonds.
These bonds were bought when interest rates were at near-zero levels. This means that their value has been drastically reduced in recent years since new bonds carry far higher interest rates. The RBA will have to keep selling these bonds at a huge loss over the coming years.
Speaking to the AFR, former RBA official and Monash University economist Zac Gross reckons the RBA could turn to the ASX banks in a bid to bolster its balance sheet:
Quantitative easing involves buying bonds when yields are low and holding them until they are higher, effectively buying when prices are high and selling low – not traditionally the best way to make a profit.
The RBA could rein in these losses by reducing the interest rate they pay on excess reserves – effectively a tax on the big four banks and Macquarie.
If this does occur, it would obviously be bad news for ASX banking profits going forward. So perhaps this is also weighing on investors' minds this week when it comes to ASX 200 bank shares.
Whatever the cause for this week's slump in ASX bank shares, investors will no doubt be hoping that things improve next week and beyond. But we'll have to wait and see what happens.
