With a steepening yield curve, or wider spread between short- and long-term Treasuries, banks could experience improved net interest margins or improved profitability as the firms borrow short and lend long.
SEE MORE: Bank ETFs Could Shine in Q4
The recent strength displayed by U.S. bank stocks is impressive as it comes at a time of notable weakness for European banks. The iShares MSCI Europe Financials ETF (NYSEArca: EUFN) is one of this year’s worst-performing non-leveraged sector ETFs. Market observers have warned that the ongoing monetary polices and depressed rates would weigh on banks’ bottom line as firms would find it hard to make money with a flat yield curve – banks borrow short-term and lend long-term.
For the moment, it appears investors are more focused on the Fed when it comes to ETFs such as KRE and XLF and that is a good thing.
“So as long as the 10 year yield stays above the latest highs, I think betting on financials relative to the S&P 500 is not a bad idea,” adds See It Market.
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