The No. 1 Sector To Buy Into Right Now

Since lowering rates increases the price of bonds, the huge addition of Treasuries to banks' balance sheets, combined with the exemption afforded them, guaranteed them some tidy profits as the Fed drove rates down.

Banks stocks have been huge beneficiaries of the recovering economy, and part of the so-called "rotation" into cyclical stocks. Investors saw the steepening yield curve as another positive for banks.

A rising yield curve means rates on the short end of the yield curve are very low, but the further out you go on the maturity spectrum, rates tend to rise, sometimes steeply – meaning greater net interest margin (NIM), for banks. NIM is the spread banks make when they borrow cheaply on the low end of the interest rate curve and lend money out at higher rates for longer periods of time.

The much-anticipated Fed statement last week about projections and decisions made in its quarterly two-day Federal Open Market Committee (FOMC) get-together said nothing about the soon-to-expire SLR exemption.

Compounding that lack of clarity, in the press conference that followed the Fed's statement, Chair Jerome Powell refused to answer a question about the expiring exemption, instead of saying there would be an "announcement coming."

Investors took that as bad news – and started net selling bank stocks.

And sure enough, on Friday, March 19, the Fed said it was letting the exemption expire on its original expiration date, March 31, 2021. And that sparked some hard-selling of big-name bank stocks.

Sellers' Big Mistake: Rising Rates Aren't a Bad Thing

Investors aren't thinking big enough; their short-sighted thinking is that banks won't be as profitable if they must calculate Treasuries back in their SLR requirements. Along those lines of faulty reasoning, they figure banks have to reserve against all the bills, notes, and bonds they bought, so they'll have to sell excess holdings to get their reserve requirements down.

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Disclaimer: Any performance results described herein are not based on actual trading of securities but are instead based on a hypothetical trading account which entered and exited the suggested ...

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