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Tuesday's Bank Stocks: Italy news drags down sector as bond yields fall

Further uncertainty over Italy's future contributed in driving down U.S. bank stocks June 5, as the sector slipped even though broader U.S. stock indexes saw slight gains.

Italy's new prime minister, Giuseppe Conte, pledged in his first speech to parliament that he will seek to boost growth through tax cuts and increased spending on social services, helping spark concerns over the country's fiscal outlook.

Bond investors sought the safety of U.S. Treasurys, helping drive down yields for 10-year government bonds to 2.918% as of 4:19 p.m. ET, down from the previous close of 2.945%, according to MarketWatch.

Bank stocks generally decline when 10-year yields fall, as those moves can put pressure on bank profits, said Jason Ware, chief investment officer at Albion Financial Group. While U.S. banks have decreased their exposure to Europe in recent years, the uncertainty out of Italy nonetheless "saps buyer enthusiasm" in the banking sector, he said.

The KBW Nasdaq Bank Index was down 0.47% to 107.43, and the KBW Nasdaq Regional Bank Index finished the day 0.30% lower at 119.65.

The Big Four banks all saw drops, with JPMorgan Chase & Co. shedding 0.56% to $107.84, Bank of America Corp. falling 0.95% to $29.12, Citigroup Inc. decreasing 0.86% to $66.76 and Wells Fargo & Co. slumping 0.60% to $54.50.

But the major U.S. stock indexes largely ended the day positive, except for the Dow Jones Industrial Average, which slid 0.06% to 24,799.98. The S&P 500 rose about 0.07% to 2,748.80 and the Nasdaq Composite Index gained 0.41% to 7,637.86.

There were few major movers today among U.S. banks, though OFG Bancorp was up 3.18% to $14.60.

Ware of Albion Financial Group flagged other items that may be holding down the sector, such as a likely rate hike from the Federal Reserve next week that would help flatten the yield curve further and potentially crimp bank profits. Investors may also be waiting until regulators release the results of annual stress tests for the largest banks in the coming weeks, which would provide clarity on whether they approve banks' dividend and buyback plans, Ware said.

"I think there's a reason, if you're a trader, to be on hold and see what the results look like," he said.

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Market prices and index values are current as of the time of publication and are subject to change.