The benchmark 10-year Treasury note yield is close to topping 3%, a mark it hasn’t reached in four years. Strengthening inflation prospects pushed bond yields higher and prompted the Federal Reserve to step up the pace of monetary tightening from two to three additional rate hikes this year.
This calls for investing in banks, insurance and brokerage houses as such institutions will see a ramp up in profits on quicker-than-forecasted rate hikes.
Inflation Heats Up
Signs of an uptick in inflation are pretty obvious. Oil prices near a three-and-a-half-year high and American companies paying a significant amount for purchasing raw materials indicate an upsurge in inflation that could easily derail economic growth in the near term. Business survey by HIS Markit has shown that cost of raw materials and partly finished goods increased at the fastest pace in nearly five years. Trump’s recent move to impose tariffs on steel and a series of Chinese goods were partly to blame.
U.S. consumer prices, in fact, rose 2.4% last month from a year earlier, marking the fastest annual pace in 12 months, per the Labor Department. Excluding the volatile food and energy segments, core prices ticked up 2.1% from year-ago levels. This turned out to be the biggest annual jump for core prices since February 2017.
U.S. 10-Year Bond Yield Near 3%
Treasuries sold off as higher commodity prices diminish the value of a bond’s fixed interest payments. As treasuries came under pressure, the 10-year yield and the 30-year yield moved north. Bond yields always tend to move inverse to prices.
The benchmark 10-year Treasury note rose 2.4 basis points (bps) to 2.973% on Apr 23, its highest level since January 2014, after hitting an intraday high of 2.996%, per Tradeweb data. The 30-year bond yield advanced 0.5 bps to 3.143%, the highest since Mar 9.
Higher Interest Rates a Boon for Financials
Shares of banks, insurance companies, and asset managers and brokerage firms were bolstered by higher interest rates in the form of an uptick in bond yields. Fed officials have rekindled the idea to raise federal funds rate four times this year and not three times that they have previously indicated. On Apr 20, the Fed-fund futures market witnessed a 40.2% chance of four rate hikes this year, much higher than a 28.6% chance on Mar 23.
Higher interest rates can boost bank profits as they increase the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities. The spread between long-term and short-term rates also expands during interest rate hikes because long-term rates tend to rise faster than short-term rates.
Rising rates also act as a boon for insurance companies as they derive their investment income from investing premiums, which are received from policyholders in corporate and government bonds. Yields and coupons on these bonds rise in response to a hike in Fed fund rates and bank interest rates. This enables life insurers to invest their premiums at higher yields and earn more, expanding their profit margins. Not only investment income, which is an important component of insurers’ top line, annuity sales should gain from a raised rate.
Brokerage firms and asset managers also advantage immensely from a rising rate environment since higher rates generally concurs during periods of economic strength and upbeat investor sentiments.
5 Solid Picks
We have, thus, selected five solid stocks from the aforementioned areas poised to gain on the rate hike prospects. These stocks boast a Zacks Rank #1 (Strong Buy) or 2 (Buy).
The search was also narrowed down with a VGM Score of A or B. Here V stands for Value, G for Growth and M for Momentum and the score is a weighted combination of these three metrics. Such a score allows you to eliminate the negative aspects of stocks and select winners.
Wintrust Financial Corporation (WTFC - Free Report) operates as a financial holding company in the Chicago metropolitan area, Southern Wisconsin, and Northwest Indiana. It operates in three segments: Community Banking, Specialty Finance, and Wealth Management. The company has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings rose 5.3% in the last 60 days. The stock’s expected earnings growth rates for the current and next quarters are 30.6% and 33.9%, respectively. Wintrust Financials’ projected growth rate for the current year is 32.1%, compared with the industry’s gain of 29%.
Community Trust Bancorp, Inc. (CTBI - Free Report) operates as the bank holding company for Community Trust Bank, Inc. that provides commercial and personal banking services to small and mid-sized communities. The company has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings rose 1.2% in the last 60 days. The stock’s expected earnings growth rates for the current and next quarters are 27.7% and 7.7%, respectively. Community Trust Bancorp, which is part of the Banks - Southeast industry, is expected to rally 19.3% this year.
BancFirst Corporation (BANF - Free Report) operates as the bank holding company for BancFirst that provides a range of commercial banking services to retail customers, and small to medium-sized businesses. The company has a Zacks Rank #1 and a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings moved up 1.8% in the last 60 days. The stock’s expected earnings growth rates for the current and next quarters are 19.7% and 29.9%, respectively. BancFirst’s projected growth rate for the current year is 27.9%, higher than the industry’s gain of 17.2%. You can see the complete list of today’s Zacks #1 Rank stocks here.
American Financial Group, Inc. (AFG - Free Report) provides property and casualty insurance products in the United States. The company has a Zacks Rank #2 and a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings climbed 0.5% in the last 60 days. The stock’s projected earnings growth rates for the current and next quarters are 14.8% and 18%, respectively. American Financial Group’s estimated growth rate for the current year is 25.8%, higher than the industry’s gain of 19.7%.
The Progressive Corporation (PGR - Free Report) provides personal and commercial auto insurance, residential property insurance, and other specialty property-casualty insurance and related services primarily in the United States. The company has a Zacks Rank #1 and a VGM Score of B. The Zacks Consensus Estimate for its current-year earnings rose 8.7% in the last 60 days. The stock’s estimated earnings growth rates for the current and next quarters are 42.4% and 97.6%, respectively. Progressive Corporation’s projected growth rate for the current year is 46.8%, compared with the industry’s 19.7%.
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