The No. 1 Sector To Buy Into Right Now

But they've got it all wrong; rising rates aren't really a bad thing.

The big picture for banks is painted by the Fed. And given the Fed's concern and coddling of big banks (which all own a piece of the Fed, by the way), there's no way the Fed is going to suddenly impact bank liquidity or profitability.

Of course, the Fed's been talking to banks, monitoring their holdings, and hinting they'll have to start including Treasuries back in their SLR calculations. There's no way the Fed would tolerate big banks unloading tens or, collectively, hundreds of billions of dollars worth of Treasuries into an unreceptive market and push rates a lot higher.

That would be "disorderly," – with a capital "D" – which the Fed chair vowed to not let happen if it looked like rates were going to spike in such a way. So, they wouldn't purposely force disorderly dumping of bonds by banks that would spike rates and freak out bond as well as equity markets.

That doesn't mean there won't be any net selling of Treasuries by banks; it just means that selling won't be disorderly to the point of causing rates to spike a lot higher.

Based on my analysis, rates are going higher anyway. And that's not a bad thing. In fact, it's especially good for banks and bank stocks, and here's why.

If rates rise because of growing pains, it means the economy – which we'd all agree was knocked for a loop last year – is growing above trend. Rising rates would be natural, and indicative of healthy demand for money and credit, the better to expand and consume more. As long as rate increases are orderly, economic participants can adjust to them.

As for banks, remember: A steepening yield curve, which is what happens when rates on the longer end of the maturity curve rise, means fatter net interest margin – meaning their profitability on loans.

Another bullish break for banks was somewhat hidden in what the Fed said about the expiring SLR exemption. The Fed said it would be taking another look at the effects it has on liquidity and markets.

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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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