“But by December, even before the Fed actually raised rates, conditions changed. Banks stocks were lagging again and the spread, or difference, between the yield on the 10-year Treasury note and the two-year Treasury note – called the 10-2 or 2-10 spread – shrunk to the extremely narrow levels seen in July 2012 and February 2015,” reports Michael Kahn for Barron’s.
One point of attraction for XLF and rival financial services ETFs has been the discounted valuations of big bank stocks. However, the cheapness of U.S. banks belies the strength of the financial sector. Over few years, banks have shed unprofitable businesses and assets while bulking up capital to return some to shareholders through stock buybacks and dividends, the Wall Street Journal reports.
“The problem with a flat yield curve is that it usually appears when the economy is heading toward recession. The details are outside the scope of this column, but it is safe to say that a flatter yield curve would be bad for bank lending. And since financial stocks make up about 16% of the Standard & Poor’s 500, weakness in that sector would create a serious drag on the stock market from a technical point of view,” adds Barron’s.
Financial Select Sector SPDR