Shouldn’t Bank Stocks Be Doing Better?

Shouldn’t Bank Stocks Be Doing Better?
Stéphane Renevier, CFA

almost 2 years ago1 min

Mentioned in story

Rising bond yields (the orange line above) don’t tend to be good news for stocks, given that they signal a rise in borrowing costs. But there is an exception to the rule: bank stocks, which typically outperform the market in that environment. Or at least, there was an exception: the purple line shows that an exchange-traded fund tracking some of the biggest bank stocks has underperformed the S&P 500 this year, even as the yield on US 10-year Treasuries has risen to 2.4% from 1.7%.

That’s probably down to the flattening of the yield curve. You see, banks borrow money at (usually lower) short-term interest rates and lend at (usually higher) longer-term interest rates, and then pocket the difference between the two. But now that short-term rates have caught up with longer-term ones, there isn’t much of a difference between the two.

Still, there could be an opportunity here: the yield curve doesn’t tend to stay flat for long, generally steepening soon after it flattens out or inverts altogether. Assuming 10-year yield remains high, that suggests the gap between borrowing and lending is going to expand again, and that banks’ profits will follow. So if you want to take advantage, you might want to pick up the SPDR S&P Bank ETF (ticker: KBE, expense ratio: 0.35%).

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