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Yields on US Treasury Notes Hit Record High: 5 Bank Picks

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On Oct 3, the U.S. 10-year and 30-year Treasury Notes witnessed a record single-day high in yields exceeding the previous mark set on the day after President Donald Trump’s election in November 2016. Notably, bond price and bond yields are inversely related. A series of recently announced economic data indicates robustness of the U.S. economic fundamentals. Riskier assets like equities have found favor with investors following the release of these data.

However, a hike in interest rate will raise the cost of funds, which in turn will enable the financial sector, especially banks, to widen the spread between longer-term assets, such as loans, with shorter-term liabilities, thus boosting the sector’s profits. Consequently, investment in banking stocks with a favorable Zacks Rank and strong growth potential will be a prudent move.

Yields Spike on Government Bonds

On Oct 3, the yield on benchmark U.S. 10-year Treasury Note gained 11 basis points to reach 3.166%, its highest since July 2011. The 30-year Treasury Note’s yield also advanced 12 basis point at 3.327%, marking its highest since October 2014. Moreover, yield on 2-year Treasury Note reached 2.864%, its highest since June 2008.

Consequently, S&P Financials Select Sector SPDR (XLF) rose 0.9% and SPDR S&P Regional Banking ETF (KRE) surged 2.4%

Several industry researchers have forecasted that yield on 10-Year U.S. Treasury Note is likely to range within 3.5% to 3.75% by the end of 2018 due to strong economic fundamentals of the U.S. economy.

Robust U.S. Economic Fundamentals

U.S. GDP grew at 4.2% in the second quarter of 2018, marking its highest gain since the third quarter of 2014 and the third-best growth rate since 2008. Unemployment rate remains at 3.9%, its 18-year low.

The Conference Board reported that the U.S. consumer confidence index for the month of August jumped to 133.4, marking its highest reading since October 2000. The ISM reported that the U.S. manufacturing index for the month of September was pegged at 59.8. Notably, any reading above 50 indicates overall growth of the manufacturing sector.

On Oct 3, the ISM reported that its services (non-manufacturing) index rose to an all-time high of 61.6 in September. Since service sector constitutes major part of the U.S. economy, market participants expect U.S. GDP to rise in third and fourth quarter.

Fed Opting for Gradual Rate Hike Policy

Average wage rate increased 0.5% in August, the rapidest pace since January. Personal income rose 0.3% in August. The core PCE index (excluding food and energy) in August - Fed’s preferred gauge of inflation measure - remained steady at 2%.

Slow buildup of inflation will enable Fed to follow a gradual rate hike policy. The Fed which raised interest rate thrice this year has already hinted that the central bank may go for fourth hike in 2018 and thrice in 2019. Increase in interest rate will again enhance the profit of financial sector especially the banks.

Our Top Picks

Strong earnings, massive tax cuts and solid economic data are likely to boost consumer spending in the coming months, which will result into higher economic growth and price level. This will lead the market interest rate to rise. Higher interest rate will eventually aid the banking industry. Consequently, banking stock stocks are lucrative investment options at the moment.

We narrowed down our choice to five banking stocks with a Zacks Rank #1 (Strong Buy) or 2 (Buy) and solid growth potential.

The chart below shows price performance of our five picks year to date.



CBTX Inc. (C(BTX - Free Report) operates as the bank holding company for CommunityBank of Texas National Association that provides commercial banking solutions to small and mid-sized businesses, and professionals in the United States. It sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here. The company has expected earnings growth of 25.9% for current year. The Zacks Consensus Estimate for the current year has improved by 8% over the last 30 days.

Horizon Bancorp Inc. (HBNC - Free Report) operates as the bank holding company for Horizon Bank that provides commercial and retail banking services. It carries a Zacks Rank #2. The company has expected earnings growth of 44.1% for current year. The Zacks Consensus Estimate for the current year has improved by 0.7% over the last 30 days.

First BanCorp. (FBP - Free Report) operates as a bank holding company for FirstBank Puerto Rico that provides a range of financial products and services to retail, commercial, and institutional clients. It carries a Zacks Rank #2. The company has expected earnings growth of 24% for current year. The Zacks Consensus Estimate for the current year has improved by 5.1% over the last 30 days.

First Bancorp. (FBNC - Free Report) operates as the bank holding company for First Bank that provides banking products and services for individuals and small to medium-sized businesses primarily in North Carolina and northeastern South Carolina. It has a Zacks Rank #2. The company has expected earnings growth of 63.2% for current year. The Zacks Consensus Estimate for the current year has improved by 1.3% over the last 30 days.

National Bank Holdings Corp. (NBHC - Free Report) operates as the bank holding company for NBH Bank that provides various banking products and financial services to commercial, business, and consumer clients in the United States.. It has a Zacks Rank #2. The company has expected earnings growth of 69.8% for current year. The Zacks Consensus Estimate for the current year has improved by 2.4% over the last 30 days.

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