US bank shares poised for third straight monthly fall

US bank shares faced another month of selling in May as the yield curve flattened, highlighting the recent deterioration in the reflation trade with the Trump administration bogged down in controversy.

The KBW Banks index dropped as much as 1.4 per cent on Tuesday and was poised for a 1.3 per cent decline for the month of May. That left the gauge, which tracks shares in America’s largest lenders, poised for its third straight monthly fall.

Investor sentiment on lenders enjoyed a sharp rally following Donald Trump’s election late last year. That, however, has soured in recent months as the businessman-turned-politician’s administration has been engulfed in a series of scandals.

The controversy that has swirled around the White House has detracted attention from Mr Trump’s pro-business policy promises that included tax reform, a large infrastructure spending programme and looser regulations.

As optimism about higher levels of growth and inflation under the Trump administration has cooled, the yield curve has flattened dramatically — a bearish factor for banks that borrow on the short-term market and lend funds out over longer periods.

In fact, the difference in yield between 10-year and three-month Treasuries, seen as an important measure for bank profitability, contracted 2.9 basis points on Tuesday to 1.29 percentage points, the first reading below 1.3pp since last September. The spread had reached a post-election high of 2.1pp in December.

“The yield curve continues to flatten as the outlook for fiscal stimulus (tax cuts, infrastructure spending, etc.) has deteriorated and longer term U.S. economic growth prospects remain weak,” noted Dennis DeBusschere, head of portfolio strategy at Evercore ISI.

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The KBW Banks index is still up 20 per cent since Mr Trump’s election. That is still a significant pullback from the 32.2 per cent rise at the beginning of March.

Among the biggest lenders, Bank of America is seen as particularly sensitive to the yield curve because of its large retail lending business. The company’s shares climbed as much as 50 per cent in the wake of the election but have since cut that rise to 35.7 per cent to trade at $23.11 apiece on Tuesday.