Source: Morningstar DBRS
September 8, 2026
Overview
For financial institutions, the implications of rising global bond yields are mixed. Firstly, banks with capital markets businesses are clear winners as they benefit from robust underwriting and trading results. Typically, higher yields would slow debt issuance, but hyperscalers and others appear to be less price sensitive, contributing to very high levels of issuance.
Conversely, noninvestment-grade financial institutions issuers will likely see higher spreads and an increase in overall funding costs, as investors can be more selective while earning an attractive yield on less risky fixed income securities.
Higher rates are also likely to slow originations as the cost of borrowing increases, which may also pressure asset quality, especially for borrowers with floating-rate loans. Subsequently, earnings will be pressured by lower originations, increased credit costs, and a higher cost of funds.
Bank and insurance fixed income securities portfolios will also suffer from unrealized losses, whose effects on earnings and capital can, however, be offset by proper asset-liability matching or interest rate hedging in the short to medium term. Moreover, higher yields will also allow banks and insurers to reinvest their maturing securities at better yields going forward. While there will clearly be some winners and losers, we expect the vast majority of our financial institutions coverage universe to remain resilient and maintain credit profiles commensurate with their current credit ratings.
Key Highlights
- Clear winners are those banks with capital markets businesses that are benefiting from robust underwriting and trading results.
- Conversely, non-investment grade financial institutions issuers will likely see higher spreads and overall funding costs, as investors can be more selective while already earning a nice yield on less risky fixed income securities.
- While there will clearly be some winners and losers, we expect the vast majority of our financial institutions coverage universe to remain resilient and maintain credit profiles commensurate with their current credit ratings.
Exhibit 1: 10-Year Government Bond Yields 2026 Year to Date
Series: U.S.; Germany; United Kingdom; France; Japan.
Source: Morningstar, Inc.
Inflation Expectations and Plenty of Debt Financing Needs Result in Rising Yields
The Iran conflict has added inflationary fears over higher rates for longer. Meanwhile, global debt issuance has grown materially, which is also causing yields to rise. According to the Securities Industry and Financial Markets Association (SIFMA), U.S. corporate debt issuance year-to-date through July 2026 was $1,681.0 billion, an increase of 26.9% year over year, with 2025 being a higher-than-average issuance year to begin with. Including treasuries, mortgage-backed securities, municipals, agency, and asset-backed securities, this total jumps to $7,400.6 billion, an increase of 10.8% (see Exhibit 2). With higher costs, businesses typically pull back on issuance. However, hyperscalers have thus far proven somewhat insensitive to yields as they race to be leaders in artificial intelligence. Issuance is likely to stay elevated for a longer period of time—especially if we layer in other needs for investment such as military spending—with the potential to continue putting upward pressure on yields.
Exhibit 2: U.S. Fixed-Income Securities Issuance (USD billions)
| Category | H1 2025 | H1 2026 |
|---|---|---|
| U.S. Corporates | 1,228.8 | 1,681.0 |
| U.S. Fixed Income | 6,601.3 | 7,400.6 |
Source: SIFMA.
Financial Institutions Asset Quality Performing Better Than Expected
Financial institutions globally continue to demonstrate resiliency despite inflation, trade wars, and heightened geopolitical risk. While some jurisdictions have seen increasing levels of delinquencies, nonperforming loans, and net charge-offs, they generally remain very manageable. Overall, asset quality performance has held up better than we anticipated.
Higher interest rates do affect consumers and businesses, especially those with floating-rate loans. Real estate valuations typically suffer as rates increase, but commercial real estate appears to have stabilized, with minimal issues, and home values in many geographies are stable to increasing. Leveraged corporates are most susceptible to higher rates, as well as lower-income households. Additionally, higher rates will likely also subdue demand for loans, especially residential real estate. Nonetheless, we currently view banks globally as adequately reserved with sound capital if their economies do deteriorate. Similarly, most insurance and non-bank financials continue to manage their balance sheet fundamentals appropriately in the current operating environment.
The Impact on Bond Portfolios of Financial Institutions
Higher yields mean lower prices for bonds, which will lead to higher unrealized losses in bond portfolios. Insurers, which often use fixed-income assets to match future claims and benefits cash flows, typically have the largest fixed-income securities portfolios as a percentage of assets, followed by banks. We note that many banks have reduced exposures in recent years by repositioning their portfolios, especially in the U.S.
Since financial institutions typically have some level of interest rate hedges in place, it is hard to generalize the potential impacts. However, higher yields and interest rates did show some weakness in interest rate management in 2023 when there were several high-profile U.S. regional bank failures. Most banks in our coverage universe, however, do incorporate unrealized losses on securities into their capital ratios. On the positive side, financial institutions can reinvest maturing securities into higher yielding ones, as well as put new premiums to work into higher yielding assets that otherwise would have similar risk profiles.
Leverage and Asset Values
Higher interest rates typically make fixed income securities look more attractive relative to stocks, but stocks have remained at near-record highs. Strong earnings growth has been supportive, but there have been plenty of discussions in the media about a potential bubble. Regardless, investors remain exuberant with markets at or near all-time highs, as evidenced by near-record levels of leverage. The Financial Regulatory Authority reported margin balances of $1.417 trillion at the end of July 2026. As a cautionary note, we believe margin calls can lead to heavy forced selling exacerbating losses, as seen recently with Situational Awareness and the South Korean stock market.
Lastly, the wealth and asset management businesses of financial institutions globally have benefitted from rising global markets. If it holds true that higher yields eventually lead to a correction, we expect earnings for these business lines would be hit from lower fees.
Related Research
- Global P&C Reinsurers H1 2026: Solid Earnings Driven by Lower Cat Losses and Resilient Investment Income, August 13, 2026.
- Key Takeaways from European Banks’ Q2 2026 Earnings Season, August 10, 2026.
- U.S. Banks Deliver Another Strong Quarter in Q2 2026 as Credit Fundamentals Remain Resilient, August 4, 2026.
- European Banking Midyear Outlook: Middle East Conflict Not Derailing Positive Earnings Dynamics, July 20, 2026.
- Finance Company Debt Issuance Holds Steady in H1 2026 Despite Turbulent Environment, July 16, 2026.
- Japanese Mega Banks’ Record F2025 Earnings Reflect a Tailwind from Rising Domestic Rates, July 12, 2026.
- Major Australia Banks H1 2026 Results: Strong Fundamentals Amid Slower Growth and Heightened Uncertainty, July 7, 2026.
- 2026 U.S. Bank Federal Reserve Stress Test Results: Key Takeaways, June 26, 2026.
- Middle East Conflict is Leading to Higher Provisions for Some Global Banks, June 2, 2026.
- Japanese Life Insurers are Managing Mark-to-Market Losses on Bonds While Showcasing Earnings Resilience, May 10, 2026.
- Geopolitical Shock in the Gulf Raises Underwriting Volatility Across Insurance Lines, March 2, 2026.
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