Today It’s The Banks’ Turn, But That Harbors A Risk

Like many, I have a go-to-market watchlist page. Mine is headed by the major indices and their futures, followed by key stocks and sectoral ETF’s. This allows me to better understand why the market is moving up or down on any given day. Today’s screen showed yet another rally in the broad market indices, with the S&P 500 (SPX) outperforming the Nasdaq 100 (NDX). The reason is that the leadership has shifted to an often-unloved sector – the banks.

I wish I could enjoy the re-emergence of that sector without worrying about the reasons behind it. These companies have valuable franchises and are leveraged to an economic recovery. Problem is, that recovery is reflected in a steeper yield curve. That sounds benign, but as banks benefit from a steepening curve, the rest of the market could suffer.

When we discuss a steeper yield curve, that refers to the difference in yields between short- and long-term fixed-income securities. In the case of US banks, the relevant benchmark is the difference between 2 and 10 year Treasuries. That spread is relatively tight by historical standards but is relatively high by a recent metric. It has actually increased during Covid since we saw an inverted curve prior to the monetary response to the pandemic. The change is almost exclusively at the long end of the curve. The short end has remained relatively fixed, with the Federal Reserve’s continued assertions that they will be slow to raise interest rates. 

Banks love a steeper curve because they tend to borrow short and lend long. This is a gross oversimplification, but banks tend to borrow via checking and savings accounts and in other short-term deposits and lend via mortgages and corporate loans. The former group is short-term (you can remove your savings with no notice, but the rate is about zero), while the latter is longer-term (mortgages are usually 15-30 years and while rates are low, they are not about zero). If banks face little pressure to raise the interest rates that they offer on-demand deposits but have room to raise the rates they charge on loans it is highly beneficial to their bottom lines.

1 2
View single page >> |


Futures are not suitable for all investors. The amount you may lose may be greater than your initial investment. Before trading futures, please read the CFTC ...

How did you like this article? Let us know so we can better customize your reading experience.


Leave a comment to automatically be entered into our contest to win a free Echo Show.