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2 Banks to Benefit the Most From a Steeper Yield Curve

NEW YORK (TheStreet) -- Despite the best efforts of the Federal Reserve, long-term interest rates are rising, which can greatly benefit some banks over the short term.

But with short-term rates likely to stay put for quite some time, investors need to consider the balance-sheet structure of a bank before assuming a benefit to earnings from the current steepening of the yield curve.

The central bank has kept its target short-term federal funds rate in a range of zero to 0.25% since late 2008, and has also been doing what it can to hold short-term rates down. The Federal Open Market Committee continues to say that the federal funds rate is not likely to be raised until the U.S. unemployment rate drops below 6.5%. With the unemployment rate rising slightly January to 7.9%, it seems unlikely that the Fed will make a move on short-term rates this year. Meanwhile, the Fed is continuing to expand its balance sheet in order to hold long-term rates low.

But investors have been anticipating the Fed's eventual reversal of course, pushing the market yield on 10-year U.S. Treasury bonds up by roughly 40 basis points to 2% over the past two months. Meanwhile, the market rate for 5-year Treasury paper has increased by 24 basis points to 0.84%.

"The fixed-income markets usually anticipate the eventual Fed moves and begin to adjust at least a year ahead of the initial Fed actions," according to Guggenheim Securities analyst Marty Mosby.

Most of the large regional banks have been seeing a steady narrowing of net interest margins (NIM) over the past two years, as their assets continue to reprice at lower interest rates. Despite the margin squeeze, a number of regional players have achieved sufficient loan growth to limit the decline of net interest income.

Mosby said in a report on Thursday that "the recent uptick in long-term interest rates has whetted the appetites of bank investors for the grand prize: rising interest rates." That would mean a traditional increase in all interest rates, following action by the Federal Reserve to raise the federal funds rate.

"The traditional rising-rate scenario is a parallel shift in all interest rates along the yield curve. This type of rate rise should benefit the most asset-sensitive banks that are extremely mismatched," Mosby wrote. In a rising-rate scenario, the banks with loans and securities investments maturing or repricing faster than their deposits and borrowings, have the most to gain over the short term.

Stock quotes in this article: WFC, STT, RF, FHN, ZION 

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