The second worst performing sector in the S&P 500 year-to-date just got a shot in the arm. The yield curve (i.e. the difference between the 10-year Treasury yield and the 2-year Treasury yield) is now 110 basis points wide. This compares to an average of 98 basis points in the second quarter of 2016 and 84 basis points in the third quarter.
This is a boon for banks.
A wider yield spread flows directly to the bottom line, since banks profit by borrowing at the short-end of the curve (taking deposits) and lending long (investing in projects with higher rates of interest). With the yield spread rising, based on an accelerating U.S. economy, bank profits (XLF) should get a boost.
“Earnings accelerating, that’s one of the main reasons to be long the banks,” Hedgeye CEO Keith McCullough said on The Macro Show earlier today.
What do you buy within the Financials sectors? Financials analyst Jonathan Casteleyn likes CME Group (CME). As McCullough explains, “This is a great way to play earnings. CME great month, in March, in terms of volume and pricing. It’s really hard to find many financial services companies that have pricing power.”