Easy Fed policy will keep recovering bank stocks in check, says this analyst

Stock futures signal Wall Street set to take another shot at records as 2020 winds down

Bond yields look unlikely to rise substantially from current lows for a while potentially capping further gains for recovering bank stocks, according to analysts at Canada-based BCA Research.

Bank shares recently followed the broader climb in long-term Treasury yields, reflecting heightened growth expectations around further fiscal stimulus and an accelerating vaccine rollout, but further rate increases could struggle to gain traction as long as the Federal Reserve keeps policy easy.

“The limited ability of yields to rise significantly” likely prevents investors from being able to confidently bet on bank stocks, said Mathieu Savary, strategist for BCA Research, in a Wednesday note.

Shares of financial firms in recent months have outpaced the rally in broader stock-market benchmarks on expectations of a cyclical recovery, sparking a rotation to underrated value shares from growth stocks that thrived throughout the pandemic.

Since the start of September, the S&P 500

has gained 7.7%, while financials have climbed 24%.

Banks also have reported strong earnings for the tail-end of last year. Morgan Stanley MS, Bank of America BAC, Goldman Sachs GS and Citigroup C were among those in recent days to report fourth-quarter earnings that trounced analysts’ forecasts.

See: Banks are back — almost half of 15 large U.S. banks are expected to increase quarterly profit

Their shares mostly remain below pre-pandemic levels, but have been aided by a sharp surge in long-dated Treasury yields. The gap between the 2-year note rateBX:TMUBMUSD02Y and the 10-year note rateBX:TMUBMUSD10Y stood at 96 basis points, around its widest since 2017.

Bank profits tend to rise when the yield curve steepens, as a wider spread between short-term and long-term bond yields can translate into higher margins from banks that look to lend out longer-term money to clients, based on lower-cost deposits.

But the Fed’s ultra-accommodative stance likely will keep yields in check.

Fed Chairman Jerome Powell and other senior Fed officials last week pushed back on recent speculation that the U.S. central bank could taper its asset purchases as soon as this year, if the economy is able to recover swifter than earlier anticipated. Soon after those comments, long-term yields pulled back, with the 10-year note rate

now trading at 1.09%.

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