Surging Treasury Yields Boost Bank Stocks: 4 Terrific Picks

On Sep 12, the Financial Select Sector SPDR (XLF) increased 1.1%, leading gains for the markets on a day when benchmarks hit record highs. Gains for financials and banks in particular were powered by rising Treasury yields. These gains came on the back of a strong selloff in Treasurys on Monday, which occurred after the impact of Hurricane Irma was much lower than feared. Additionally, a widely anticipated North Korean missile test failed to materialize.

Replacing these lingering concerns was a couple of encouraging developments. U.S. job openings surged to a record level and Treasury Secretary Steven Mnuchin provided encouraging comments on tax reforms. This indicates that investors’ appetite for risk will only rise in the days to come, leading to a further spike in yields. Adding select bank stocks to your portfolios looks like a profitable option at this time.

Geopolitical Fears Subside, Irma Impact Less than Feared

Ultimately, the impact of Hurricane Irma was less than feared earlier. Also, after a widely anticipated missile test from North Korea failed to materialize, geopolitical tensions subsided substantially. As a result, the yield on the 10-year U.S. Treasury Note increased by 4.5 basis points to 2.171%, a level not witnessed since August. Yields on the 30-year and 2-year Treasury notes also increased to 2.774% and 1.335%, respectively.

Tuesday’s spike in yields followed a strong selloff in Treasurys on Monday. On this occasion, a sharp selloff in bonds ensued with investors forsaking safe-haven assets for riskier investment options. Consequently, the 10-year yield increased to 2.125%, marking the largest single day gain since Jul 25.

Tuesday’s increase takes the weekly increase for the 10-year Treasury note to more than 11 basis points. The rise in yields boosted the likes of Goldman Sachs (NYSE:GS) and JPMorgan Chase (NYSE:JPM) which gained 2.2% and 1.2%, respectively. Since banks lend over the long term and borrow for shorter periods, an increase in the long-term yield is beneficial for them. This boosts net interest margin, an important profitability metric for the banking sector.

Job Openings Data, Mnuchin Interview Raises Optimism

An increase in rates and better prospects for the banking sector are generally accepted as a sign of economic strength. Data released on Sep 12 seemed to back such an inference, with U.S. job openings hitting a record level in July. With the metric increasing from 6.12 million to 6.17 million in July, job openings have now exceeded the 6 million mark for two successive months. This is first such occurrence since the inception of this particular Department of Labor report. Additionally, data from the Census Bureau has revealed a significant year-over-year increase in income levels.

Meanwhile, Treasury Secretary Steven Mnuchin has offered encouraging comments about tax reform efforts. Speaking at an investment conference in New York, Mnuchin said he was hoping that the Republican Party would be able to push tax reforms through Congress within this year.

Further, he revealed that the Trump administration may seek to backdate the benefits of such reform to the beginning of the current year. Such comments provide a firm basis for a further rise in yields.

Our Choices

With the abatement of geopolitical and weather related tensions, investors are looking to reap stronger profits from relatively riskier assets. Encouraging developments regarding the economy are also helping to stoke such optimism.

A selloff in bonds is resulting in a spike in yields, which bodes well for banks. Picking up banking stocks looks like a smart option at this point. We have narrowed down our search to the following stocks based on a good Zacks Rank and other relevant metrics.

Zions Bancorporation (NASDAQ:ZION) offers a wide variety of commercial and retail banking and mortgage-lending financial services.

Zions Bancorp has expected earnings growth of 41.3% for the current year. Its earnings estimate for the current year has improved by 0.1% over the last 30 days. The stock has a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

State Street Corporation (NYSE:STT) 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 (Buy). The company has expected earnings growth of 16% for the current year. Its earnings estimate for the current year has improved by 0.6% over the last 30 days.

Pinnacle Financial Partners, Inc. (NASDAQ:PNFP) is a bank holding company which owns 100% of the capital stock of Pinnacle National Bank, a national bank operating in the Nashville, TN metropolitan area.

Pinnacle Financial has a Zacks Rank #2. The company has expected earnings growth of 14.3% for the current year. Its earnings estimate for the current year has improved by more than 0.3% over the last 30 days.

Western Alliance Bancorporation (NYSE:WAL) is the parent company of Western Alliance Bank and offers a range of banking products and services.

Western Alliance Bancorp has a Zacks Rank #2. The company has expected earnings growth of 21.5% for the current year. Its earnings estimate for the current year has improved by 0.3% over the last 30 days.

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