Will Banking Sector Issues Affect Corporate Bonds?

Banking sector concerns continue to weigh on the markets. The prices of many fixed income investments issued by financial institutions—like investment-grade corporate bonds and preferred securities—fell in early March on the heels of the failures of Silicon Valley Bank and Signature Bank. Prices have generally rebounded from the lows, but they have yet to get back to those pre-bank failure levels.

Corporate bond investors may be wondering if this is something they should be worried about. We continue think that most large U.S. banks are well-capitalized, while liquidity concerns appear to be less of an issue given the Federal Reserve's new term funding program. Bank earnings growth may be challenging in the near term, but that may be more of an issue for their stocks than for their bonds.

  • Bonds issued by financial institutions do make up a large share of the investment-grade corporate bond market, but that doesn't change our guidance. Bank bonds tend to have higher average credit ratings than the average investment-grade borrower, but there are still risks, of course. Bonds issued by smaller banks and that have low credit ratings, like in the "Baa/BBB" area,1 might be one segment to keep an eye on, if you're an investor who holds individual bonds.
  • Preferred security prices are likely to remain volatile, as the market is dominated by financial institutions, but investors who are willing to take additional risks and can ride out some volatility can still consider them to earn higher income.