Skip to main content

Believe it or not, U.S. bank stocks might welcome end of QE

ROB Insight is a premium commentary product offering rapid analysis of business and economic news, corporate strategy and policy, published throughout the business day. Visit the ROB Insight homepage for analysis available only to subscribers.

U.S. bank stocks continue to rocket higher along with long term interest rates. The steepness of the U.S. yield curve – the difference between two-year and 30-year mortgage rates – remains the best indicator of short term American bank stock performance. The potential for reduced central bank monetary stimulus is a new, and potentially positive, wrinkle for investors in the sector.

Concerns regarding the end of Federal Reserve-led monetary stimulus have combined with signs of a strengthening U.S. economy to drive 30-year U.S. Treasury yields sharply skyward. The yield on the 30-year bond jumped almost 100 basis points between April and August this year.

Story continues below advertisement

The two-year bond yield rose a mere eight basis points for the same period. As a result the U.S. yield curve is now markedly steeper than four months ago.

Banks – who borrow funds at short term rates and lend them out at higher, longer term levels – are among the biggest beneficiaries of a steeper yield curve. So its not a huge surprise that the KBH U.S. Bank Index has tracked the steepness of the Treasury yield curve (which we measure in this case as the difference between the yield of the 30-year bond and that of the two-year) with a correlation of 0.94. (see chart)

U.S. bank investors will have the most at stake – and possibly most to gain – when the Fed begins withdrawing monetary stimulus, although much of the damage may already be priced in. If the U.S. yield curve steepens even further when the Fed reduces its asset purchase program, and the Evans Rule holds (that there will be no rise in short term rates until the unemployment rate falls further), bank stocks are likely to climb.

Scott Barlow is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here to read more of his Insights , and follow Scott on Twitter at @SBarlow_ROB .

Report an error Editorial code of conduct
Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed.

Read our community guidelines here

Discussion loading ...

Cannabis pro newsletter