Shares of European banks fell to their July lows amid a bond sell-off

During Wednesday's trading session, shares of European banks Société Générale and Deutsche Bank fell by more than 5% amid political instability that led to a rise in bond yields. Meanwhile, the Euro Stoxx Banks index fell 3.4%, hitting its lowest level since July. All stocks in the index were trading lower, including BNP Paribas, Credit Agricole, and UniCredit. As a result, the banking sector lost some of the gains it had accumulated since the beginning of the year, according to Bloomberg.

European markets came under pressure amid concerns over the possible resignation of the French government and a sharp rise in the country’s budget deficit. Investors are reacting particularly strongly to the political and economic crisis in France by selling off its bonds: the yield spread between 10-year French and German government bonds has widened to about 140 basis points, according to Bloomberg. The series of crises in France threatens to drag the European Central Bank into a standoff with investors, the likes of which it has not seen since the eurozone debt crisis more than a decade ago, the agency writes.

Until the recent decline, European bank stocks had significantly outperformed both the broader regional market and the stocks of their U.S. competitors this year. Despite the pullback in recent weeks, the sector is still up 12% since the beginning of 2026. At the same time, the Euro Stoxx Banks index has already fallen more than 8% from its August high.

However, the current decline “looks more like a risk-off episode driven by investor sentiment and positioning than the start of a downturn caused by deteriorating fundamentals,” JPMorgan strategists wrote on Wednesday, according to a note cited by Bloomberg. They described the current pullback as a good entry point for bank stocks, particularly French ones. JPMorgan’s base-case scenario assumes that bond yields will not rise significantly above current levels. According to the strategists, the direct impact of widening sovereign bond yield spreads on bank balance sheets should be limited.

The indirect consequences may prove to be more significant—for example, changes in the structure of deposits or the impact of the macroeconomic situation on the quality of bank assets. However, as the strategists note, even here, “the focus is primarily on market sentiment, the assessment of the likelihood of various scenarios, and how long the widening of spreads will last—rather than on an immediate, mechanical blow to capital or liquidity.”

Shares of U.S. banks joined the sell-off as yields on long-term U.S. Treasury bonds rose to their highest levels in 24 years, according to CNBC. Shares of Citigroup, Wells Fargo, and Goldman Sachs each fell nearly 2% on October 7. Shares of JPMorgan Chase, Bank of America, and Morgan Stanley declined by about 1%.

Wells Fargo's stock fell following reports that the U.S. Department of Housing and Urban Development (HUD) is investigating whether the bank violated nondiscrimination lending laws when it sought to increase the proportion of African Americans among homeowners, Bloomberg reports.

Although bond yields retreated from their highs after October 7 following a successful offering of 10-year bonds, bank stocks continued to trade in the red. As a result, the S&P 500 Financials sector lost 0.4% by the close of trading on October 7.

This article was AI-translated and verified by a human editor