The recent spike in Treasury yields gave regional banking assets like the Invesco KBW Regional Banking ETF (KBWR) a big boost. Many market observers believe this corner of the banking sector is primed for more upside this year.
KBWR seeks to track the investment results of the KBW Nasdaq Regional Banking Index. The fund generally will invest at least 90% of its total assets in the securities that comprise the underlying index.
The underlying index is a modified-market capitalization-weighted index comprised of companies primarily engaged in U.S. regional banking activities, as determined by the index provider. The underlying index is designed to track the performance of U.S. regional banking and thrift companies that are publicly-traded in the United States.
“Regional banks’ stocks are emerging as winners in a world of rising interest rates, analysts said. Investors have been anxious that the hotly debated $1.9 trillion stimulus, which President Joe Biden signed on Thursday afternoon, could help overheat the economy and result in higher interest rates,” reports Darla Mercado for CNBC.
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While rising interest rates might not appeal to borrowers, they certainly help regional banks. Higher rates charged on loan products can also translate to higher profits. Higher mortgage profits could provide regional banks with sustainable revenue over the next few years.
Adding to the case for KBWR is that 10-year yields may have more room to run higher.
“Given our base case view that yields continue to move higher from here, our analysis would suggest that banks still have further room to run,” said Ken A. Zerbe, equity analyst at Morgan Stanley in a March 8 research note.
One of the reasons is regional banks’ propensity to move with the ebbs and flows of the economy. When the economy is thriving, regional banks can trend higher and vice versa.
Regional banks could also benefit from rising rates should the Federal Reserve move away from their stance to keep rates steady as the economy improves. Profits from lending products, such as mortgage loans, could give regional banks more tailwinds. A steeper yield curve would also help KBWR.
“The yield curve is the difference between short-term and longer-term interest rates. A steeper curve helps banks’ profitability because they can borrow at the low short-term rates and then lend at the higher long-term rate,” concludes CNBC.
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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.