For banks, the silver lining in the bond rout is in the margins

The bond market sure has been active this week. Yields on government debt have been hitting multi-decade highs. The Treasury secretary keeps unveiling new plans to try and get the debt to come down while giving the impression that he's totally not worried about it anyhow. And the government is competing for buyers with the AI hyperscalers, which is putting more pressure on yields. 

On top of all of that, the U.S. national debt crossed the $40 trillion mark this week. The Trump administration's response has been to promise it will unveil an "increased focus on fiscal consolidation," this week or next. But that is of little comfort. It took only four years to go from $30 trillion to $40 trillion. It took five years to go from $20 trillion to $30 trillion. It took nine years to go from $10 trillion to $20 trillion. It took 27 years to go from $1 trillion to $10 trillion.

The debt is now growing exponentially. I'm not sure what plan can slow down that train.

$40 trillion is a scary-sounding number, and it's certainly not a good sign. But it doesn't portend imminent collapse. Japan has a worse debt-to-GDP ratio than we do, and has for years. The U.S. is still the largest economy in the world, and we do have considerable assets. I mean, if it came down to it we could always sell a couple of aircraft carriers, or a national park, or our copy of the Magna Carta. Our financial position isn't great, but we do still have options.

And though the dollar has basically been unchanged this year, of course the bitcoiners are licking their chops about all this. They've all been waiting for a monetary meltdown to prove that their digital totem is the one, true money that can lead us out of the darkness, or something like that. As the credit markets have turned down, bitcoin's traded up about $10,000 just this week. I'm getting story pitches about this that are barely masking their glee.

But the irony of all this ominousness is that rising yields are actually kind of a good thing for banks. U.S. banks as a group posted their best median net interest margins in the last ten years, according to S&P Capital IQ. NIM had fallen in the first quarter. 

The industry's median NIM rose to 3.87% in the second quarter, up 21 basis points from a year ago. The median yield on loans rose by 10 basis points to 6.55%. Meanwhile, the median cost of deposits was flat at 1.76%. 

Nearly 80% of the industry banks – 3,280 – saw a sequential improvement in loan yields, up from only 15% in the first quarter. And about half the banks posted a quarterly decline in deposit costs. To be sure, those numbers are for a time period that ended June 30; they don't include anything happening this week or month. But I suppose if banks can hold the line so to speak they can get through this.

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That's a nice silver lining but it isn't the whole picture for banks, of course. The state of the economy matters immensely to every bank's customers, and the economic health of those customers matters immensely to every bank's profitability. If the U.S. goes into an economic tailspin that will hurt banks. It's just that that doesn't appear to be happening yet. The credit market may be more volatile than usual but it hasn't seized up or done anything drastic. Bloomberg's total US credit index is basically flat on the year, and looking at analyst notes from several banks I can't see any big fears about a credit meltdown. Credit is the oil of the market engine, and it is still flowing.

The bottom line is that this economy has problems, and they do seem to be pretty fundamental, and those problems could potentially spark some kind of economic avalanche. And if that happens, I think the banking industry as a whole will be okay, but tighter credit conditions and slack demand for credit will increase the competition among banks and end this period where banks have it about as good as it gets. But we're not there yet, so you can either prep the bunker or keep dancing while the music is playing, as Citi's Chuck Prince once rather infamously said.