Why Bank ETFs Are Surging

U.S. banks have been on a tear in recent weeks given the rise in Treasury yields. The 10-year Treasury yields hit the highest level since early June, leading to a steepening of the yield curve. 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.

Yields Rising

As the markets are bracing for heightened volatility over the election results, investors’ turned skittish, putting money into the Treasury bonds. Notably, the Treasury bonds tracking the long end of the yield curve often provide a safe haven.

Bill Merz, head of fixed income research at U.S. Bank Wealth Management in Minneapolis, pointed to “the potential for a significant amount of volatility in the market as some traders have positioned for Democrats to win the White House and control of Congress in the election.” According to him, the scenario will result in higher fiscal spending and more Treasury supply that would boost economic growth and lift inflation.

Further, the Federal Reserve pledged to keep interest rates at lower levels until the end of 2023. The central bank will not increase rates until labor market conditions return to the “maximum employment,” and inflation has risen to 2% and “is on track to moderately exceed 2% for some time. This strategy is pushing the long-term yields higher than the short-term, sparking huge rally in longer-dated Treasuries.

Moreover, the rounds of upbeat data instilled confidence in the economy, thereby leading to a spike in the banking sector. This is because an improving economy will buoy demand for loans and all types of banking services. In particular, Americans grew optimistic about the economy and are spending higher since the coronavirus pandemic began. The housing market is booming with rock-bottom mortgage rates and higher demand for homes.

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Disclosure: Zacks.com contains statements and statistics that have been obtained from sources believed to be reliable but are not guaranteed as to accuracy or completeness. References to any ...

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