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Bank Stocks Tank on Sharp Fall in Treasury Yields, Uncertainty

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The S&P 500 and the Nasdaq's 2.2% and 3.85% respective rise on Wednesday has perked up investors despite the election uncertainties. However, banking stocks stood on the other side witnessing losses.

The yield on benchmark 10-year Treasury note plummeted sharply from the five-month highs on the election uncertainties and doubts over another stimulus package. Specifically, the rate on the 10-year Treasury bond shrunk 13 basis points (bps) to 0.771%, underlining the biggest decline since April. Further, the yield on the 30-year Treasury bond contracted to 1.55%.

Notably, as investors moved toward safe-haven assets, which sunk the benchmark 10-year Treasury yield, pushing bond prices higher, bank stocks took a hit resisting the rally in the broader market.

A sell-off was witnessed with the SPDR Financial Select Sector ETF (XLF - Free Report) and the SPDR S&P Bank ETF (KBE - Free Report) losing 1.17% and 5.38%, respectively, on investor concerns. Markedly, among major banks, Bank of America (BAC - Free Report) , Wells Fargo (WFC - Free Report) , JPMorgan (JPM - Free Report) , Citigroup (C - Free Report) and U.S. Bancorp (USB - Free Report) turned red, depreciating 4.09%, 0.95%, 3.06%, 3.33% and 4.46%, respectively.

Specifically, reduction in long-term interest rates hurt banks’ profitability, as the spread earned by these financial firms on longer-term assets, including loans, narrows, which is funded by shorter-term liabilities. Moreover, the election outcome is likely to have a significant impact on banks as the next president might influence the tax policy and other issues, including an economic stimulus. This, in turn, will impact banks’ bottom-line numbers.

Conclusion

The coronavirus pandemic has sent jitters across global markets, including the United States. Concerns over the pandemic’s negative impact on the U.S. economy had escalated investors’ anxieties earlier and caused the yield on benchmark 10-year Treasury note to sink since the virus outbreak, with some monthly volatility. Therefore, amid the uncertain financial markets, election results, the Federal Open Markets Committee (FOMC) meeting’s outcome and bond yields will be deciding factors for the movement of bank stocks in the upcoming period.

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