On May 15, the yield on the U.S. 10-year Treasury note jumped to touch its highest point since 2011. The immediate trigger for this jump was an increase in April retail sales. Data of this nature was indicative of the U.S. consumer’s strong purchasing power. Further, reports emerged that trade tensions between the United States and China were likely to continue.
Trade-related tensions are likely to boost prices higher, which would depress bonds and boost yields. Though such an occurrence could weigh on broader markets, financials stocks, particularly banks would be benefited. This is because a spike in rates increases the yield spread for banks. Adding banking stocks to your portfolios looks like a smart option at this point.
Benchmark Yield Climbs as Retail Sales Increase
On Tuesday, the yield on the 10-year Treasury note increased by 7.5 basis points to 3.070%. This is the highest level achieved since July 2011. It also marks the biggest single-day increase since March 1. Further, the yield also hit an intra-day peak of 3.093%. Notably, the day’s gains lifted the yield spread between the 10-year and 2-year rate to 48.5 basis points.
The immediate trigger for the jump in the benchmark yield was bullish retail sales data for April. Retail sales increased at a seasonally adjusted rate of 0.3% in April from March, according to the Commerce Department. March sales were, in fact, revised to show a 0.8% advance instead of 0.6%.
Trade Tensions Likely to Remain High, Banks to Gain
Also boosting the yield on the 10-year Treasury note was the resurgence of trade-related tensions. Terry Branstad, the U.S. Ambassador to China commented on Tuesday the United States and China remain “very far apart” on settling trade-related disputes. Branstad’s views were in line with comments made by U.S. Commerce Secretary Wilbur Ross on May 14.
Tensions emanating from such a dispute can boost inflation levels and erode the value of fixed-income securities, thus pushing up yields higher. A sector which could immediately benefit from higher yield levels is banking.
Shares of banks are bolstered by higher interest rates in the form of an uptick in bond yields. 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. (Read: Resurgence of 10-Year Bond Yield: Winners & Losers)
The rise in benchmark yield levels is primarily an outcome of encouraging retail sales numbers and the resurfacing of trade-related tensions. While unemployment is at a record low, a quick resolution to the trade dispute looking increasingly. This is why such inflationary pressures are unlikely to dissipate in the near-term.
Adding banking stocks to your portfolios looks like a profitable option at this time. This is because they are likely to benefit from the widening of the yield spread. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.
Associated Banc-Corp (ASB - Free Report) is a bank holding company, which through its subsidiaries Associated Bank, National Association and various non-banking subsidiaries, provides an array of banking and non-banking products and services.
Associated Banc-Corp has a Zacks Rank #1 (Strong Buy). The company has expected earnings growth of 27.8% for the current year. The Zacks Consensus Estimate for the current year has improved by 10.7% over the last 30 days.
Commerce Bancshares, Inc. (CBSH - Free Report) is one of the largest bank holding companies in Missouri, with its principal offices located in Kansas City and St. Louis.
Commerce Bancshares has expected earnings growth of 30% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.8% over the last 30 days. The stock has a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.
Northern Trust Corporation (NTRS - Free Report) is the holding company for its main subsidiary, Northern Trust Company, as well as a number of other banking and non-banking financial service subsidiaries.
Northern Trust has a Zacks Rank #2 (Buy). The company has expected earnings growth of 34.2% for the current year. The Zacks Consensus Estimate for the current year has improved by 4.2% over the last 30 days.
State Street Corporation (STT - Free Report) is a financial holding company. It provides a range of products and services for institutional investors worldwide through its subsidiaries.
State Street has a Zacks Rank #2. The company has expected earnings growth of 30.6% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.4% over the last 30 days.
M&T Bank Corporation (MTB - Free Report) is the holding company for M&T Bank and Wilmington Trust, National Association.
M&T Bank has a Zacks Rank #2. The company has expected earnings growth of 33.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.1% over the last 30 days.
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