Things have been looking up for the bond market, with U.S. Treasury yields rising on news of modest developments in the U.S. economy and a promising vaccine rollout program.
Specifically, the rate on the 10-year Treasury bond jumped 5 basis points to 1.48%, hitting second-highest level since March 2020, when the coronavirus outbreak sent jitters across global markets. Further, the yield on the 30-year Treasury bond has climbed to 2.25%.
What’s Causing Higher Yields?
This year started on an optimistic note with several companies bagging vaccine approvals and signs of improvements in the economic conditions. Per the Federal Reserve’s Beige Book survey on current state of economic conditions, economic activity expanded modestly from January to mid-February.
Despite challenges from supply chain disruptions, overall manufacturing activity for most districts increased moderately. The report further stated that a slight uptick in activity related to oil and gas production and energy consumption was observed. The period also saw improvement in transportation activities.
Financial institutions witnessed lower loan volumes, but with lower delinquency rates and elevated deposit levels. Also, historically low mortgage rates supported demand for both new and existing homes.
Further, on Tuesday, President Biden said that he plans to accelerate the process of vaccine rollout and ensure the availability of Covid-19 shots for every adult American by the end of May, i.e. two months earlier than previously forecasted.
How Banks Benefit From Higher Yields?
It should be noted that bond prices and yields move in opposite directions. Thus, higher rate on the 10-year Treasury bond will push bond prices lower, resulting in rise in bond issuances.
Also, as banks seek to borrow money at short-term rates and lend at long-term rates, a steepening yield curve will help them earn more on lending and pay less on deposits, thereby leading to a wider spread. This will expand their net interest margins and support revenue growth.
Thus, given this favorable development, bank stocks are soaring. Notably, KBW bank index have rallied 21.3%, significantly outperforming the S&P 500's gain of 3.2% so far this year.
Choosing Bank Stocks Worth Betting on
The vaccine breakthroughs can be seen as a big positive for the banking sector. Also, the rollback of mandates placed during pandemic, specifically Texas, allowing business to open in full capacity, indicates that the banking industry is gradually coming out of the woods. Thus, it is the right time to add some fundamentally strong banks to your portfolio.
Hence, with the help of the Zacks Stock Screener, we have picked five bank stocks that investors can consider despite the challenging operating backdrop. All these stocks have a market capitalization of more than $2 billion and carry a Zacks Rank #1 (Strong Buy) or #2 (Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.
Moreover, these banks have expected current-year earnings growth rate of 15% or more. Further, these stocks have gained more than 30% over the past three months.
Headquartered in Dallas, TX, Comerica Incorporated CMA offers commercial banking products and services. The bank has a market cap of $9.7 billion. Shares of the company have rallied 31.3% in the past three months. Also, the bank has an expected earnings growth rate of 61.2%. The stock currently flaunts a Zacks Rank #1.
East West Bancorp, Inc. EWBC based in Pasadena, CA, has gained 58% over the past three months. It offers various personal as well as commercial banking services. The company has a market cap of $10.4 billion. Its earnings are projected to be up 18.1%. Also, the stock carries a Zacks Rank of 2, at present.
Investors Bancorp, Inc. ISBC headquartered in Short Hills, NJ, offers various banking products and services. The company’s shares have appreciated 33.4% in three months’ time. It has a market cap of $3.3 billion. The company’s current-year earnings are projected to increase 23.4%. The stock currently carries a Zacks Rank of 2.
Shares of KeyCorp KEY have soared 30.1% over the past three months. It provides various banking products and services, and also offers cash management services, investment banking and capital markets products. Based in Cleveland, OH, the bank has a market cap of $20.1 billion. In addition, the company’s earnings are anticipated to be up 46% in 2021. Presently, the stock flaunts a Zacks Rank of 1.
Headquartered in Dallas, TX, shares of Triumph Bancorp, Inc. TBK have surged 68.1% in three months’ time. It provides banking and commercial finance products and services to retail customers and small-to-mid-sized businesses. The company has a market cap of $2 billion. Moreover, the company’s earnings will likely rise 41.9% in 2021. Currently, the stock sports a Zacks Rank of 1.
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