In one of the surest signs that investors are betting that the Federal Reserve will boost interest rates at some point this year, 10-year Treasury yields have surged 34.3% over the past six months.
Another sign that cements the notion that investors are preparing for higher borrowing costs is the price action in the SPDR S&P Regional Banking ETF (NYSEArca: KRE). All KRE, the largest regional bank ETF has done over the past six months is surge 18.4%.That is better than double the returns offered by the Financial Select Sector SPDR (NYSEArca: XLF) over the same period.
A rising interest rate environment will throw a wrench into the financial markets. Nevertheless, bank-related exchange traded funds could weather the storm as financial firms have positioned ahead of the potential rate changes. KRE’s sensitivity to interest rates is well known. The ETF rose just 2% last year after surging 47% in 2013 when yields spiked. KRE’s holdings have an average beta of +0.44 to moves in the US 10 Year Treasury. [Look to Bank ETFs in a Rising Rate Environment]
Another out-performing bank ETF has been the SPDR S&P Bank ETF (NYSEArca: KBE), which has surged 18.6% over the past six months.
“Though it is not a dedicated regional bank fund, the SPDR S&P Bank ETF is pretty close with nearly 78% of its weight devoted to regional banks. The rest of the fund’s holdings are spread among diversified banks, capital markets firms and thrifts, among others. Like the SPDR S&P Regional Banking ETF, the SPDR S&P Bank ETF is an equal-weight fund,” according to TheStreet.com.
Bank valuations are also back up. Looking at price-to-book multiples, the most popular measure for valuing the sector, U.S. banks of the KBW banks index are trading near fair value at a 16% premium to book value, or about the same valuations in the summer of 2008. The sector has shown it is capable of trading a even higher valuations of three or even five times book value, but banks are unlikely to return to the late 199s levels. [Muted Bank ETF Expectations]
An improving U.S. economy could foster increased borrowing and financing by businesses, large and small, across the U.S. while benign mortgage rates could also provide a lift to the mortgage lending operations of regional banks.
Investors have added $280.1 million to KRE and $73.2 million to KBE since the start of the current quarter.
SPDR S&P Regional Banking ETF
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.