What happened

The stock market in general is selling off on Tuesday, and the financial sector is getting hit worse than most others. Three notable companies that are especially weak today are Capital One (COF 0.03%), Discover Financial Services (DFS 0.07%), and Mastercard (MA 0.25%). As of this writing, they are down by approximately 6%, 7%, and 4%, respectively.

So what

As I mentioned, the stock market as a whole is under pressure on Tuesday. As of this writing, the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite are all down between 2.5% and 3% for the day.

Various interest rates written on pieces of paper, with a question mark on top

Image source: Getty Images.

The main reason for the sell-off appears to be recession fears. The yield curve inverted for the first time in nearly a decade, which is generally a good predictor of recessions. (In plain English, the three-year Treasury yield exceeded the five-year yield.) While there's no way to accurately predict when a recession will occur, recessions are usually preceded by yield curve inversions.

As a result of this bond market activity, the 10-year bond yield has also been plummeting. The 10-year yield is widely considered to be a barometer of long-term interest rates, and low long-term rates are a bad thing for banks. Without getting into too much detail, banks' profit margins generally rise when long-term rates increase. When long-term rates fall, the opposite is often true.

Now what

The bottom line is that the plunge in bond yields and the inversion of the yield curve could lead to lower profits for banks, which is why the sector is one of the hardest-hit today. The widely used 2-year and 10-year Treasury yields aren't yet inverted, but the spread between them has narrowed considerably. If those two benchmark yields were to invert, we could certainly see more pain in the financial sector.