Treasury QE, Falling Bank Deposit Rates & Financial Repression
- 3 days ago
- 6 min read
Updated: 2 days ago
"JOE KERNEN: You know what wouldn’t help the yen is if Warsh and co. raised rates in September.”
"SCOTT BESSENT: Well, I think we have to look and think, what does an increase in the short-term rate actually do?"
August 5, 2026 | In this issue of The Institutional Risk Analyst, we review the latest WGA Bank Top 50 listing for subscribers to the IRA Premium Service. There has been a brisk amount of churn in the bank rankings despite the strong results from Wall Street. Some of the leaders from earlier in Q1 2026 are now lagging the group rather noticeably. And Q2 bank earnings confirmed six straight quarters of falling loan yields and bank deposit rates.
To provide some context to Q2 2026 bank results, the financial markets have been providing the lion’s share of bank earnings while interest earnings have been relatively flat. The Street has been feasting on volatility. But now, with the explicit repo rescue for Japan to forestall an involuntary sale of Treasury paper, all eyes are on the US Treasury, the big doggie to the Fed’s tail. The cast of characters for the next period of financial repression are in position.
Recall that Treasury Secretary Scott Bessent helped George Soros during the 1992 crisis to execute a massive short-selling bet against the British pound. Today the staggering $40 trillion federal debt and other factors are driving LT interest US rates higher, but will likely see the short-end of the yield curve fall. What does this mean for US banks and bond investors? Are we about to see some Treasury QE ℅ Scott Bessent while Fed Chairman Kevin Wash watches politely?
The chart below shows the average gross loan yield for Peer Group One less the average interest expense. But for a 25bp reduction in funding costs in Q1, the industry’s net spread on loans would have fallen significantly. And we suspect that funding costs could move lower in 2H 2026 as reserve balances ebb and banks are forced into Treasury bills. But loan yields may also continue to fall in a market that seems to be awash in liquidity.
Source: FFIEC
The Q3 results for the WGA Bank Top 50 were quite telling. Goldman Sachs (GS) dropped from #1 in Q1 to 26th in the latest quarter and Morgan Stanley (MS) likewise fell from #1 in Q2 to 15th in Q3 2026 as the AI sector selloff accelerated, especially over the past 52-days. As the Street has pushed the skew in volatility lower, we suspect that a lot of institutional money is going to take shelter in bank deposits and bank stocks. Investors and captive media continue to pretend that current market conditions are "normal," but the chart below suggests otherwise.
Source: Nomura
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