Bank Stocks Vulnerable as Rate Outlook Heads Lower

By Michael Kahn

Just two months ago, when investors were still expecting banks’ net interest margins to improve, the SPDR S&P Regional Banking exchange-traded fund jumped to a 52-week high. The move fully erased the summertime market swoon. Big banks represented by the SPDR Bank ETF, while not quite as strong, scored technical breakouts above major moving averages and enjoyed a brief period of market leadership.

But by December, even before the Fed actually raised rates, conditions changed. Banks stocks were lagging again and the spread, or difference, between the yield on the 10-year Treasury note and the two-year Treasury note – called the 10-2 or 2-10 spread – shrunk to the extremely narrow levels seen in July 2012 and February 2015.

John Kosar, director of research at Asbury Research, said, “This represents a major decision point for the 2s/10s curve, which often leads the direction of long-term U.S. interest rates.”

In other words, should this “support” level break to the downside, long-term rates are likely to move lower, not higher, resulting in an even flatter yield curve. And that will be exacerbated if the Fed continues on its mission to raise short-term rates further. Minutes of the most recent Fed meeting, released Wednesday, suggested Janet Yellen and the Federal Open Market Committee are not in a hurry to hike interest rates.

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Asbury Research subscribers can view a chart and more detailed analysis of this inflection point in the yield curve in our Monday January 4th Keys To This Week report, which is available by logging into the Research Center.