Bank ETFs To Consider On A Steepening Yield Curve

The 10-year Treasury yields have been on a steep rise in recent months. It climbed to the highest levels in nearly a year after registering a biggest weekly rise since June. On the other hand, short-term yields are on a steady rise given the persistent surge in COVID-19 cases, indicating that the yield curve is steepening.

Notably, the 10-year yields jumped to 1.165% while 2-year yields edged up to 0.149% on Jan 12. The spread between these two yields widened to 1.02 percentage points, marking the steepest yield curve since May 2017.

Yield Curve Steepens

The steepening of the yield curve came on the back of inflationary expectations. The 10-year U.S. breakeven inflation rate, a proxy for annual inflation expectations, climbed above 2.10% this week for the first time since 2018.

The massive money flowing into the economy coupled with hopes of a bigger fiscal stimulus and more Treasury supply under a Democratic-led U.S. Congress is expected to lift inflation and in turn driving the long-term yields higher. Additionally, the wider reach of COVID-19 vaccinations has spurred the expectation for a swift economic recovery, pushing the long-term yields higher. An improving economy will buoy demand for loans and all types of banking services.

On the other hand, the Fed has pledged to keep short-term interest rates near zero until “substantial further progress” has been made toward reaching maximum employment and healthy inflation. According to Mizuho International Plc’s Peter Chatwell “a resurgence in global growth in 2021, along with the Federal Reserve’s increased tolerance for inflation, should fuel price pressures.” The inflation rate could reach or surpass the Federal Reserve’s 2% target in some months.

Banks to Win

As banks seek to borrow money at short-term rates and lend at long-term rates, a steepening yield curve will earn more on lending and pay less on deposits, thereby leading to a wider spread. This will expand net margins and increase banks profits.

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