The Federal Reserve raising interest rates for the first time in nearly a decade last month and expectations for several more rate hikes this year are viewed as positive catalysts for many financial services stocks and exchange traded funds, but the near-term outlook for the sector is clouded due to a flattening yield curve.
Prime rates are the interest rates that commercial banks charge credit-worthy clients and are typically determined by the federal fund rate, or overnight rate that banks lend to one another.
Major banks hiked their prime rates in response to the Fed’s decision to raise its main short-term rate to a range of 0.25% to 0.5% from its previous range of 0% to 0.25%.
However, these banks have held off on raising the deposit rates, or the interest rate banks pay to account holders. The average interest rate on a savings account is about 0.48%, according to Bankrate.
The wider discrepancy between deposit and prime rates could translate to improved profit margins and a potentially stronger financial sector ahead. [Bank Sector ETFs Could Lead as Rates Rise]
More pressing is recent price action in financial services stocks and ETFs, which highlights the group’s vulnerability to a flattening yield curve.