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Yield Curve Intervention Weighs on Recent Bank Performance – Will Jackson Hole Help or Hurt?

Published on August 26, 2026

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Bill Hebel

Brian Herlihy

Post Secretary Bessent’s announcement that the Treasury was doubling the size of the buyback for longer dated treasuries, the banks seem to have at least temporarily taken a pause after a strong 2 ½ month stretch. This stretch coincided with a confluence of solid conference updates and subsequent 2Q bank results, dissents from 3 different Fed governors at the July 29^th meeting in favor of higher rates, a more cryptic Fed reaction function under Chair Warsh, and more aggressive positioning by investors that the curve would continue to steepen at the long end. From 6/1 through 8/18 the KRE advanced 12.5% while the S&P returned a relatively paltry 1.2%. From 8/18 through yesterday, the S&P is down 0.19% while the KRE is down 3.28%. Coincident with the retracement has been a flattening in the 2-10 curve from roughly 53bps to 44bps.

We would argue that the recent underperformance in bank stocks has been more of a technical reaction to the flatter curve from the macro/trend following community than any real extrapolation from dedicated investors. From a bank investor standpoint, the 3 month – 5 year curve is a much better approximation of a bank lending curve and it has been very consistent over the past few months. However, we would argue that the shape of the 2-10 curve has had a bigger impact on flows from macro/trend following investors. While Treasury has now intervened a few times at the long end (yen intervention included), it really doesn’t change the fact pattern that the economic data continue to be solid and credit and capital in the banking system are in good shape. To that end, Dennis and the Quant team put out a report yesterday (here) looking at the cash yield of Financials relative to the rest of the S&P. In the chart below, you’ll notice that Financials lead the list with 64.5% of S&P Financials posting a total return yield above the 10yr Treasury of ~2x the S&P index.

The Cash Return factor, constructed using yield, payout ratio and growth, has been the best performer within the S&P this year, gaining 13.8% YTD. The factor return breakdown shows Financials have been the major driver of its gains this year, which is in line with strong cash return yield for the sector.

According to Dennis & team, within S&P Financials, going long high Cash Return names and short low Cash Return names has generated a 15.7% YTD returns. So, even within a high cash returns sector, investors have shown a preference for the cash return factor.

So where does that leave us for Jackson Hole? Whenever we see positioning become very one sided (towards steepeners) combined with a newly interventionist Treasury, and a Fed Chair who likely needs to give a little more transparency on the Fed’s reaction function, we tend to believe it likely argues for a bit more volatility/potential flattening in the very short term. The very recent inflation data has also been a bit more benign which may also very well keep the long end in check. Whether it’s softer inflation data or a Fed Chair who may need to burnish his inflation bona fides, both could very well lead to the same short-term outcome (stable to potentially more curve flattening).

While this may keep macro flows in check in the banks near term, we would remind investors of the positive fundamental backdrop that continues to exist. The move up in the belly of the curve continues to help with fixed asset reprice which helps offset some of the creeping deposit costs associated with better loan growth. Capital markets activity continues to be robust, credit benign, and as Dennis pointed out above, the capital return continues to be a substantial differentiating factor relative to the S&P. As such, to the extent we see some more choppiness near term, we continue to favor US Bancorp (USB) for its above average fee income mix, NIM improvement story and accelerating capital return story. At ~1 multiple point cheaper than quality peers like PNC & MTB, along with a lower beta likely helped by the above average fee component, we believe USB has the ability to handle any shorter-term dislocations in the banks due to macro factors. We reiterate the Sector Outperform and our $70 target.

Current Rating Distribution

Coverage Universe	Percent
Sector Outperform	31.25
Sector Perform	50
Sector Underperform	18.75

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