Steepening Yield Curve a Bullish Sign for Bank Stocks

As you probably know, the banking sector has been one of the best performing of the year (up 28% year to date). I think it’s safe to say that the banks have probably become a bit overbought here, and that a correction of some sort is due. So, if you’re not already long the banks, it would be foolish to buy them here.

But, that short term overbought situation aside, one of the things that has been happening lately, that is very bullish for banks, is that the yield curve has been steepening for the first time in a while.

The difference in yield between the 10 year government bond and the two year government bond has risen sharply so far this year, and that speaks directly to banks “Net Interest Margin.“

As you probably know, banks make money by borrowing short term at low rates, and lending long term at high rates. That difference is called the Net Interest Margin, and that’s the profit the bank earns.

Well, as the yield curve steepens, the net interest margin of banks increases. So, despite the potential of a decline in the short term, the underlying fundamentals are turning more positive for banks, and a decline in the banks should be viewed as a long term buying opportunity.

Finally, while a steepening yield curve is bullish for bank stocks, there is actually an ETN that you can buy that actually rises as the yield curve itself steepens. The ETN symbol is STPP. Seems like there’s an ETF (or ETN) for everything these days.