Bank earnings season may lay bare the toll from soaring Treasury yields

The earnings season is here once again, and the first reports tomorrow will come from the large Wall Street banks, as usual.

Much of the familiar focus will be on whether lenders beat earnings expectations, but a bigger underlying storyline could be developing this time. It centres on how the latest jump in Treasury yields is affecting the banking industry and, through that, the wider US economy.

To begin with, higher rates and yields are not automatically bad news for banks. Lenders can charge more on the money they lend out, potentially leaving them with wider margins as they chase higher profits. Yet there is another side of the equation to keep in mind.

More costly borrowing is also likely to weigh more heavily on demand, especially demand for loans. Businesses may put off expansion plans, and households may hold back on taking out a new mortgage because financing has become too expensive.

That is therefore one of the main elements to track in this week's earnings releases.

On top of that, banks face higher funding costs and may need to offer better deposit rates to stop customers moving their money elsewhere. Even an improvement in lending income would not automatically translate into stronger profit margins.

Credit quality is another area to watch. If borrowers struggle to keep up with repayments, banks could see more missed payments and, potentially, larger loan losses. Any clues along those lines would give markets another sign that tighter financial conditions are beginning to hurt businesses and households.

To be clear, none of this suggests that serious problems are already emerging across the banking sector. Still, these signals can serve as a useful gauge for markets asking whether higher yields are starting to filter into the real economy.

So this week it is worth looking beyond how much money the banks are making. Just as important is watching for signs that their customers are beginning to feel the strain.