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Fed Trends Could Bring Down Bank Stocks for 2013

Getting back to the bank stocks, higher long-term rates mean improved net interest margins for most banks over the long haul, but what most banks really need to significantly boost their net interest income is an increase in short-term interest rates.

The short-term federal funds rate has remained in a range of zero to 0.25% since late 2008, and the FOMC has said repeatedly it is unlikely to change this policy at least until the national unemployment rate drops below 6.5%.

While Summers was known to have more hawkish views on Federal Reserve monetary stimulus than Bernanke, Janet Yellen, the Vice Chairwoman of the Board of Governors of the Federal Reserve System, is known to have similar views to Bernanke, and is the highest-profile candidate to succeed the current Fed chairman.

Before a nominee for Fed chair goes to the Senate floor for a confirmation vote, the Senate Banking Committee must approve the president's choice, and any one member of the Banking Committee can place a hold on a nomination. With the clock ticking and plenty of potential market volatility, Obama needs his nominee to be attractive to both parties. There was plenty of opposition to Summers among Democratic members of the committee. Among Republican members, Senator Richard Shelby (R., Ala.) stands out for having voted against Yellen's nomination to be Fed Vice Chair in 2010.

So even Yellen -- clearly the less-controversial choice of what were the two highest-profile possible candidates -- might not sail through the nomination process.

Which Stocks Should Investors Avoid?

Of course, nobody can predict how the Fed's nominating process will proceed, what will happen on Wednesday after the FOMC meeting, or how the market will react for the rest of the year, especially since any Fed tapering of bond purchases could already be "baked in" to the market. But investors riding solid gains in bank stocks wishing to avoid short-term volatility might want to pay heed.
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According to KBW, "the largest financial stocks have a median positive correlation with the 10-year treasury yield of 0.78." KBW put together a list of financial stocks with performance closely tied to the sharp increase in the yields on 10-year Treasury bonds this year. Here are the five most closely correlated:
  • TD Ameritrade (AMTD). The shares have returned 67% this year through Friday's close at $27.67. The stock's performance has had a 0.92 correlation with the 10-year yield, according to KBW.
  • U.S. Bancorp (BBT) of Minneapolis. The stock has returned 18% this year through Friday's close at $37.14 and has a 0.91 correlation to the rising yield for the 10-year bond.
  • M&T Bank (MTB) of Buffalo, N.Y. The shares are up 16% this year through Friday's close at $111.93. The stock's rise this year has had a correlation to the rise in the 10-year yield of 0.90.
  • Prudential Financial (PRU). The stock is up 52% this year through Friday's close at $79.69, and has had a correlation to the 10-year of 0.90.
  • Charles Schwab (SCHWO). The shares have returned 55% this year, through Friday's close at $22.03, and has also had a 0.90 correlation to the rise in the yield on the 10-year bond.

Here are some big banks with strong year-to-date stock performance, with a correlation to the rising 10-year yield of over 0.80: :
  • Shares of Morgan Stanley (MS - Get Report) have returned 48% this year through Friday's close at $28.13. The rise in the shares has had a 0.83 correlation with the 10-year yield, according to KBW.
  • Bank of America (BAC - Get Report) is up 25% this year through Friday's close at $14.49, following a 110% return in 2012. The stock this year has had a 0.82 correlation to the rising yield for the 10-year bond.
  • Shares of Wells Fargo (WFC - Get Report) have returned 26% this year through Friday's close at $42.19, and has had a 0.82 correlation to the 10-year bond.
  • Capital One (COF - Get Report) has returned 18% this year through Friday's close at $67.49, and has had a correlation to the 10-year of 0.81.

-- Written by Philip van Doorn in Jupiter, Fla.

>Contact by Email.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.
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