(Reuters) - Shares in the biggest U.S. banks, typically buoyed by rising interest rates, dipped Tuesday after the benchmark U.S. Treasury yield topped 3 percent for the first time in four years and some analysts worried about higher interest rates slowing the economy.
The S&P 500 bank sector closed down 0.2 percent or roughly 10 percent below its Jan. 29 intraday high, which was its highest level since Oct 2007. In comparison the S&P 500 closed down 1.3 percent for the day.
JPMorgan Chase (NYSE:JPM) was the biggest drag on the sector with a 0.5 percent decline, followed by Bank of America (NYSE:BAC), which fell 0.4 percent, and Citibank, down 0.5 percent. Fifth Third Bancorp (NASDAQ:FITB) rose 4 percent after its profit beat expectations.
Bank stocks often trade higher on the prospect of rising rates as higher interest rates tend to boost bank profits.
The rise in the benchmark 10-year Treasury yield to its highest in over four years reflected the durability of the U.S. economic expansion, signaled Tuesday by stronger consumer confidence and new home sales figures.
At least one analyst covering the sector said the modest declines were just a reaction to the broader market decline.
"Investors will get past it and realize fundamentals are still improving and the banks' stock price outperformance will be realized again," said Marty Mosby, analyst at stock broker-dealer Vining Sparks, of Memphis, Tennessee. "Rates are historically low and we haven't gotten to that tipping point yet. The eventual down-draft or recession is a couple of years away."
But Charles Peabody, a partner at research firm Portales Partners LLC, in Chatham, New Jersey, said high rates could dampen credit and take a toll on banks as soon as this year.
"We've already seen an inflection point in the consumer side," Peabody said. "We've not yet seen it in the corporate side. That's what we're going to see in the second half of the year."
Peabody is watching for the point when corporate credit quality starts to deteriorate.
"You're in a topping process for profits and stocks," he said. "Markets are already discounting it."
Peabody said a 2016 Bank of America forecast that a 100 basis point increase in interest rates could add $7 billion to net interest income annually compares with a January 2018 forecast that a 100 basis point rise would add $3 billion.
"It's still positive but substantially less," he said.