Rising Interest Rates Mean Trouble for Banks, Insurers

jumpingsharkIf you were around in the ‘70s, you may recall the episode of the sitcom Happy Days in which Fonzie (in his trademark leather jacket) jumped over a shark pen on water skis. This had been one of television’s most popular shows, but the shark-jumpingepisode marked the beginning of its decline. The term “jumping the shark” would go on to become synonymous with reaching a point where there’s nowhere to go but down.

Which brings me to banks and insurance companies.

Over the past few months, analysts have been shouting from the rooftops that banks and insurance companies are the best way to play rising interest rates. But I think the current outlook for these companies has reached a point of inevitable decline. In short, they may have jumped the shark.

First, let’s look at banks.

Many analysts describe banks as “black boxes” – hard for ordinary investors to understand. But banks’ business models are actually pretty basic. Banks make money on interest rate spreads and fees.

While interest rates were low, more people refinanced their mortgages. This generated hefty fees for the banks taking on the risk of lending money.

Now that interest rates are on their way up, they will make money on the interest rate spreads. The only problem here is that fee revenue is drying up and rates aren’t likely to see the sharp increase needed to make up the difference.

Mortgage Fees Are Drying Up

After touching 1.6%, the 10-year yield soared as high 2.7%, pushing up mortgage rates along with it. It’s currently sitting at 2.65%.

This dramatic rise in rates has effectively shut off the spigot in refinancing – possibly all at once. Deciding whether to refinance boils down to how much money you will save. The recent shock that we’ve seen as rates rose quickly has offset more than a year of rate declines.

If you don’t believe me, check it out for yourself. Pick up the phone and call your mortgage banker. I’ll bet the phone doesn’t ring twice before he answers. That’s because they aren’t very busy.

This could be a

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