Bank stocks took a beating Thursday after the Commerce Department reported the economy grew faster during the first quarter than experts had estimated.
The 2.8.% growth rate represented a significant leap from the previous quarter's sluggish 0.5%. The news sent Treasury bond prices falling as investors worried that inflation and interest rates would also rise.
The yield on the benchmark 30-year Treasury bond - which moves in the opposite direction from its price - increased to 7.06% Thursday, its highest level since August.
The interest rate-sensitive S&P bank index fell 2.77%, while the S&P 500 slipped 11.20%. Among the hardest hit banks were Wells Fargo & Co., whose shares fell $7, to $237.75; Chase Manhattan Corp., down $3.125, to $55.75; and BayBanks, off $2.75, to $102.50.
Scott Brown, an economist at Raymond James & Associates Inc., said the selloff could have been worse but that some investors were waiting to see today's Bureau of Labor Statistics report on payrolls. "If it wasn't for the payroll figures, we would be down a lot more," Mr. Brown said.
Economists are predicting payrolls will increase by 120,000 jobs. Higher than expected payroll figures would be an indication of a robust economy, which is "bad news," said Mr. Brown, "because we'll see inflation and wage pressure, and the Fed will come in and tighten interest rates."
Though investors may be concerned over potentially rising interest rates, few bank analysts are.
"Banks are penalized more on the short-term basis because they are perceived to be more receptive to interest rates," said Michael Mayo, an analyst with Lehman Brothers Inc. "In the long term, the impact is often exaggerated."
In fact, Mr. Mayo argued, community and retail banks, such as Southern National Corp., tend to benefit in a higher-rate environment. Southern National closed at $27.25, down 37.5 cents.
David Berry, an analyst with Keefe, Bruyette & Woods, noted that when the yield on the benchmark 30-year Treasury bond goes up, the stock of big banks usually falls simply because the bigger banks trade more. But banks in general tend to be less rate-sensitive than industrial corporations, he said.
Banks have improved their ability to respond to fluctuating interest rates, said analyst Charles Vincent of PNC Institutional Investment Services, in an effort to "avoid serious pressure when interest rates go up or down."
He added that, while banks have little reason to worry about short-term rates, "longer-term interest rates could significantly affect banks, because (the higher rates) would drive down the value of their portfolios."