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MNI: Fed Says Yield Spike Straining Equity Valuations, Banks


Financial markets and parts of the banking system are coming under increasing pressure while businesses and consumers are generally in better shape, according to the Federal Reserve's latest report on financial stability published Friday.

“Since the May 2023 report, valuations in equity markets increased modestly from an already high level even as yields on Treasury securities increased substantially. Liquidity in Treasury markets remained challenged,” the report said. “Prices of residential and commercial properties remained high relative to fundamentals.”

The banking system is sound and resilient, the Fed said, but ripples from the turmoil that swept through regional banks in March are still being felt.

“The increase in interest rates over the past two years has contributed to declines in the fair value of longer-maturity, fixed-rate assets that, for some banks, were sizable,” the Fed said.

“Most domestic banks have ample liquidity and limited reliance on short-term wholesale funding; nevertheless, some banks continued to face funding strains, likely owing to vulnerabilities associated with high levels of uninsured deposits and declines in the fair value of assets."

The real economy was facing a brighter outlook, the Fed said, arguing that the balance sheets of businesses and households remain solid.

“Measures of the ability of firms to service their debt remained strong. Household debt remained at modest levels relative to GDP, with most of that debt owed by households with strong credit histories or considerable home equity,” the bi-annual Financial Stability Report said.

MNI Washington Bureau | +1 202 371 2121 |
MNI Washington Bureau | +1 202 371 2121 |

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