Also, the shape of the Treasury yield curve has flattened this week. For example, iPath US Treasury Steepener ETN (NYSEArca: STPP) is down nearly 4% this week after a strong rally since early May that seems to have helped regional banking ETFs.
When the yield curve steepens, it means the spread between yields on short-term bonds and long-term bonds is increasing. When the curve flattens, then the gap is narrowing.
“[R]egional banks are not immune to changes in the shape of the yield curve. A flatter yield curve reduces the spread between the rate at which banks can borrow and lend because they fund most long-term loans through short-term deposits,” according to a Mornignstar analyst report on KRE. “A steepening yield curve tends to have the opposite effect. So, investors in KRE should have a strong risk tolerance and a belief on a banking-sector recovery and a steepening yield curve.”
SPDR S&P Regional Banking ETF
iPath US Treasury Steepener ETN
Full disclosure: Tom Lydon’s clients own KRE.