This account is pending registration confirmation. Please click on the link within the confirmation email previously sent you to complete registration.
Need a new registration confirmation email? Click here
Stocks Under $10 with 50-100% upside potential - 14 days FREE!

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.

1 of 3

Select the service that is right for you!

COMPARE ALL SERVICES
Action Alerts PLUS
Try it NOW

Jim Cramer and Stephanie Link actively manage a real portfolio and reveal their money management tactics while giving advanced notice before every trade.

Product Features:
  • $2.5+ million portfolio
  • Large-cap and dividend focus
  • Intraday trade alerts from Cramer
  • Weekly roundups
TheStreet Quant Ratings
Try it NOW
Only $49.95/yr

Access the tool that DOMINATES the Russell 2000 and the S&P 500.

Product Features:
  • Buy, hold, or sell recommendations for over 4,300 stocks
  • Unlimited research reports on your favorite stocks
  • A custom stock screener
  • Upgrade/downgrade alerts
Stocks Under $10
Try it NOW

David Peltier, uncovers low dollar stocks with extraordinary upside potential that are flying under Wall Street's radar.

Product Features:
  • Model portfolio
  • Stocks trading below $10
  • Intraday trade alerts
  • Weekly roundups
Dividend Stock Advisor
Try it NOW

Jim Cramer's protege, David Peltier, identifies the best of breed dividend stocks that will pay a reliable AND significant income stream.

Product Features:
  • Diversified model portfolio of dividend stocks
  • Alerts when market news affect the portfolio
  • Bi-weekly updates with exact steps to take - BUY, HOLD, SELL
Real Money Pro
Try it NOW

All of Real Money, plus 15 more of Wall Street's sharpest minds delivering actionable trading ideas, a comprehensive look at the market, and fundamental and technical analysis.

Product Features:
  • Real Money + Doug Kass Plus 15 more Wall Street Pros
  • Intraday commentary & news
  • Ultra-actionable trading ideas
Options Profits
Try it NOW

Our options trading pros provide daily market commentary and over 100 monthly option trading ideas and strategies to help you become a well-seasoned trader.

Product Features:
  • 100+ monthly options trading ideas
  • Actionable options commentary & news
  • Real-time trading community
  • Options TV
To begin commenting right away, you can log in below using your Disqus, Facebook, Twitter, OpenID or Yahoo login credentials. Alternatively, you can post a comment as a "guest" just by entering an email address. Your use of the commenting tool is subject to multiple terms of service/use and privacy policies - see here for more details.
Submit an article to us!
DOW 16,551.61 -11.69 -0.07%
S&P 500 1,933.17 +2.50 0.13%
NASDAQ 4,370.3030 +0.53 0.01%

Brokerage Partners

Rates from Bankrate.com

  • Mortgage
  • Credit Cards
  • Auto

Free Newsletters from TheStreet

My Subscriptions:

After the Bell

Before the Bell

Booyah! Newsletter

Midday Bell

TheStreet Top 10 Stories

Winners & Losers

Register for Newsletters
Top Rated Stocks Top Rated Funds Top Rated ETFs