Big Banks Slide on Rate Jitters: Financial Losers

NEW YORK ( TheStreet) -- KeyCorp ( KEY) was the loser among the nation's largest banks on Wednesday, with shares down 2.4% to close at $10.48.

The broad indices saw a second day of 1% declines, as investors continued to worry over the timing and magnitude of the Federal Reserve's eventual slowdown of its balance sheet expansion.

The Fed has kept the short-term federal funds rate in a range of zero to 0.25% since late 2008. The Federal Open Market Committee has said repeatedly that it would be "appropriate" to keep the federal funds rate in this range until the U.S unemployment rate drops below 6.5%, assuming inflation is kept in check.

With the Department of Labor reporting Friday that the unemployment rate had increased to 7.5% in May from 7.4% in April, there seems no chance of the FOMC changing its policy on short-term rates at its next meeting on June 18-19.

But the Fed has also been making monthly purchases of $85 billion in long-term securities in an effort to hold long-term rates down. The market has anticipated a curtailment of bond-buying by the central bank, sending the yield on 10-year U.S. Treasury securities up 54 basis points from the end of April to 2.24% Wednesday afternoon.

The Mortgage Bankers Association early Wednesday said that the average rate for "conforming" 30-year fixed-rate mortgage loans increased to 4.15% from 4.07% the previous week. This was the highest average rate since May of 2012.

Conforming mortgage loans are those that meeting the basic underwriting and down payment requirements for immediate purchase by Fannie Mae ( FNMA) or Freddie Mac ( FMCC).

The MBA also said that despite the higher rates, mortgage loan applications were up. The adjusted Purchase Index increased 5 percent from the previous week, while the unadjusted Purchase Index increased 14 percent from the previous week and 6% from a year earlier.

In a note to clients early Wednesday, BMO Capital Markets economist Alex Koustas called the increase in mortgage loan applications "a bit of a bright spot after the index took a four week nose dive, dive, as mortgage rates hiked up nearly 50 bps on continued speculation of Fed tapering."

Koustas added that "mortgage rates are now at their highest level since the pre-QE3 spring of 2012, something sure to catch the eye of the Fed."

The KBW Bank Index ( I:BKX) was down 1% to close at 60.91, with all 24 index components showing declines.


-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.