The frenzy in the bond market spells trouble for banking stocks and could create broader issues for the FTSE 100.
Bond markets have had a tumultuous week, with the UK’s 30-year gilt yields hitting a 27-year high. This was triggered by a global sell-off, as well as political unease stemming from a Downing Street reshuffle and nerves surrounding the Autumn Budget.
Kathleen Brooks, research director at XTB, said: “If long dated bonds continue to fall, and yields continue to rise, this could be a problem for banking stocks.”
Weakness in banks could hurt the FTSE 100, with the sector being a “major driver” of the index.
“Financials are the largest weighting in the FTSE 100,” Brooks said.
Bank stocks power FTSE 100
HSBC, which boasts a market cap of over £165bn, is the second most valuable constituent of the FTSE 100.
The FTSE 100’s Big Five – HSBC, Standard Chartered, Barclays, Natwest and Lloyds – have a combined value of over £336bn. This accounts for more than 15 per cent of the index’s market capitalisation.
City AM’s analysis earlier this year revealed that the Big Five alone have added £80bn in market value so far this year.
As the FTSE 100 struggled against the bond meltdown, Brooks said it was the “financial and communication sectors” acting as a drag on the index.
Banking shares have rallied as the bond market cooled down on Thursday. Natwest has jumped over one per cent to 516.20, from previous lows of 501.6. Lloyds and Barclays have increased to 79.9 and 365.35 from respective slumps of 77.52 and 356.45 earlier in the week.
Britain’s banking giants hold a substantial amount of government bonds making them vulnerable to a sharp and rapid increase in gilt yields.
In September 2022, after long-dated gilt yields soared at an unprecedented pace, the Bank of England was forced to intervene and buy gilts to restore market order.
If the central bank had not intervened a fire sale in the gilt market would have led to banks unable to sell the assets quickly or easily without a hefty hit to value which would have sent ripples across the financial services sector.