Market Minute: Bond Yields and Bank Stocks

By: Donald_W_Dony

Interest rates are starting to rise. What industry group likes that? The banks.

Interest rates are set by the FOMC and reflect a number of factors.

They are a tool to control inflation and maintain healthy economic growth.

The FOMC rises or lowers the fed fund rate by means of through its monetary policy. When the Fed wants rates higher, it sells its securities to banks and consequently removes funds from their balance sheet. This gives banks fewer reserves which allow them to raise rates. To lower the rate, the Fed purchases securities from its member banks and deposit that credit onto the banks' balance sheet.

A trend of lower interest rates is good news for the stock market as it sends a message that the Fed is a accommodating and wishes for more economic growth. An increase in rates says the opposite that the Fed needs to slow growth and contain inflation.

Most industries view higher rates and loan costs as a negative, except the banks.

When rates starts to rise, it gives the banks more room between the rate that they borrow from and the rate that they offer to their clients.

Short-term U.S. Treasury bond yields closely reflect the rise or fall of interest rates. They also follow the movement of the Bank index. This is largely due to a increase or decrease in profits that short-term rates have on the profitability of most banks.

Bottom line: U.S. 5-year Treasury bonds yields move with the U.S. Bank index. Because of this close relationship, investors in the banking sector can gauge the trend of the banks by the yields of 5-year bonds. These key short-term yields tend to lead the banks and can provide a valuable gauge to this sector.

By Donald W. Dony, FCSI, MFTA
www.technicalspeculator.com

COPYRIGHT © 2018 Donald W. Dony
Donald W. Dony, FCSI, MFTA has been in the investment profession for over 20 years, first as a stock broker in the mid 1980's and then as the principal of D. W. Dony and Associates Inc., a financial consulting firm to present.  He is the editor and publisher of the Technical Speculator, a monthly international investment newsletter, which specializes in major world equity markets, currencies, bonds and interest rates as well as the precious metals markets.   

Donald is also an instructor for the Canadian Securities Institute (CSI). He is often called upon to design technical analysis training programs and to provide teaching to industry professionals on technical analysis at many of Canada's leading brokerage firms.  He is a respected specialist in the area of intermarket and cycle analysis and a frequent speaker at investment conferences.

Mr. Dony is a member of the Canadian Society of Technical Analysts (CSTA) and the International Federation of Technical Analysts (IFTA).

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