Last week was the official kickoff to third-quarter earnings season, with the majority of financial institutions in the U.S. reporting results. The quarter was very similar to Q2, with most banks showing little to no loan growth and subdued results from their capital markets activities. Offsetting this was significant improvement in credit quality that led to loss reserve releases and a boost to income. One new theme this quarter was the effect that higher interest rates had on the mortgage business, with most banks showing a decline in mortgage revenues of between 25% and 50% versus last year, mainly from lower refinancing activity. We can’t help but think that this was in the Federal Reserve’s mind when it announced the continuation of QE, in part due to the “tightening of financial conditions.” From a bondholder perspective, capital levels continue to improve across the sector, which strengthens the balance sheet and credit quality of banks. This is likely why banks have outperformed the broader corporate market significantly this year, and are currently trading at the tightest credit spread levels in quite some time.