Rally in Bank Shares Lifts U.S. Stocks

Increased investor optimism about the banking system helped lift U.S. stocks Tuesday, with shares of regional banks including

First Republic Bank

FRC 29.47%

at the forefront of a broad market rally.

Buoyed in part by reassuring comments by global financial authorities, both the S&P 500 and the Dow Jones Industrial Average posted their second consecutive day of gains for the first time since Silicon Valley Bank and Signature Bank collapsed less than two weeks ago.

Yields on U.S. government bonds also climbed sharply—with the two-year Treasury yield notching its largest single-day gain since 2009—as investors scaled back recent bets that an economic downturn could force the Federal Reserve to start cutting interest rates in the near future.

The S&P 500 gained 51.30 points, or 1.3% to 4002.87. The Dow Jones Industrial Average rose 316.02 points, or 1%, to 32560.60 and the technology-focused Nasdaq Composite climbed 184.57 points, or 1.6%, to 11860.11.

The KBW Bank index rose 5%. Shares in big U.S. banks such as JPMorgan Chase posted strong gains, while some smaller lenders surged. Shares in big U.S. banks such as JPMorgan Chase posted strong gains, while some smaller lenders surged. First Republic stock jumped $3.59, or 29%, to $15.77 after shedding nearly half of its value Monday.

Western Alliance



two other midsize banks that have come under pressure, each climbed more than 14%.

Stocks advanced ahead of Wednesday’s interest-rate decision from the Fed. Having once thought that the central bank could raise rates by 0.5 percentage point this month, investors have recently been debating whether officials will keep up their fight against inflation with a more modest 0.25 percentage increase or refrain from raising rates altogether until financial conditions stabilize.

Aiding Tuesday’s rally, Treasury Secretary

Janet Yellen

suggested the government could, if necessary, take further steps to shore up the banking system. Earlier this month, Ms. Yellen and other federal regulators used emergency powers to guarantee uninsured deposits at Silicon Valley Bank and Signature, while also setting up a new Federal Reserve lending program to help banks to meet withdrawal requests. 

“Our intervention was necessary to protect the broader U.S. banking system. And similar actions could be warranted if smaller institutions suffer deposit runs that pose the risk of contagion,” Ms. Yellen said.

Meanwhile, some banking-industry representatives and lawmakers have called for an expansion of deposit insurance, although it isn’t clear whether such a move would be politically viable in Congress.

JPMorgan Chief Executive

Jamie Dimon

is leading discussions about new efforts to stabilize the troubled First Republic, The Wall Street Journal reported Monday. The bank has become a focus of investors worried that a flight of deposits from midsize banks triggered by the run on Silicon Valley Bank could lead to a pullback in lending and drag on economic growth.

“The equity market is not pricing in a full banking crisis,” said

Seema Shah,

chief global strategist at Principal Asset Management. “There’s not panic setting into that investor space, which is certainly a very important thing.”

In Europe, bank stocks and bonds also recovered, following choppy trading Monday sparked by UBS’s emergency takeover of Credit Suisse. UBS’s stock climbed 12% to 19.43 Swiss francs.

Regulators made attempts Monday to calm bond investors after a risky type of bank debt, known as additional tier 1 bonds, tumbled. The selloff came after Credit Suisse’s AT1 bonds were wiped out as part of the troubled Swiss bank’s hastily arranged sale to rival UBS.

Additional tier 1 bonds ticked higher Tuesday, with a roughly $1 billion AT1 exchange-traded fund from Invesco gaining 16 cents, or 0.8%, to $20.86.

Wall Street and investors have deliberated over whether the Fed will raise interest rates again this week.


Michael Nagle/Bloomberg News

The Fed, meanwhile, was looming larger in investors’ minds after days spent intensely focused on the banking sector.

Some analysts have argued in recent days turmoil in the banking sector would keep the Fed from raising rates on Wednesday. Nevertheless, a growing consensus has emerged that the Fed will still lift rates by 0.25 percentage point.

Fed-funds futures showed Tuesday afternoon that investors were pricing in a roughly 86% chance that the central bank lifts interest rates by 0.25 percentage point for a second consecutive time, according to data from

CME Group.

“I probably agree with consensus that they are likely going to hike 25 basis points tomorrow,” said Blake Gwinn, head of U.S. rates strategy at RBC Capital Markets. “I don’t necessarily think it’s the right option, but I just think…they really want to separate out the financial stability tool kit from the inflation fighting tool kit.”

Along with its decision on interest rates, Fed officials could have a significant impact on markets by signaling what their plans are for the future.

Some analysts have warned that Fed officials, including Fed Chair

Jerome Powell,

may be less concerned than investors that rate increases pose a serious threat to financial stability. If that becomes apparent on Wednesday, stocks could decline, these analysts say.

In a sign that investors were already recalibrating their interest-rate bets, prices of U.S. Treasurys posted major declines Tuesday, pushing their yields higher.

The yield on the two-year U.S. Treasury note, which is especially sensitive to changes in the near-term interest-rate outlook, settled at 4.175%, according to Tradeweb, up from 3.922% Monday.

The yield on the 10-year note also climbed, to 3.603% from 3.477% Monday. Yields on both bonds, however, remain well below their levels from two weeks ago.

Wednesday’s interest-rate decision, along with accompanying economic projections and Mr. Powell’s post-meeting press conference, could have a complicated impact on the bond market, some investors said.

Typically, bond prices would fall in response to Fed guidance suggesting that higher interest rates are ahead. Yet, in the current climate, some believe that longer-term bonds could actually rally in such a scenario if investors were worried enough that higher rates would drive the economy quickly in a recession.

If it looks like Fed officials are “just going to put blinders on and hike their way through this thing, I think markets are going to look at that and just say ‘Man, this is going to break,” said Mr. Gwinn.

Write to Sam Goldfarb at sam.goldfarb@wsj.com and Caitlin McCabe at caitlin.mccabe@wsj.com 

Corrections & Amplifications
UBS shares rose 12% to 19.43 Swiss francs. An earlier version of this article incorrectly expressed the price in U.S. dollars. (Corrected on March 21)

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