With the 10-year treasury yield rising 86bps since the start of May, investors have been asking several questions on the group. Still, Jason M. Goldberg, CFA of Barclays notes that the 10-year is relatively low compared to historical standards. Of note, the current 10-year remains in the bottom decile when examining data back to 1800. Additionally, this recent back-up in the long end of the curve has not resulted in a move in shorter-end rates like Fed Funds or 3- month Libor. This report examines the implications for the increase in the long end of the curve, though we highlight that higher short-term rates, coupled with a steep yield curve and greater economic expansion, would be a more beneficial backdrop.

Treasury Yield

As detailed herein, historically, a back-up in the 10-year yield has resulted in:

  • Mixed stock price performance, though better performance when accompanied by yield curve steepening.
  • A decline in unrealized AFS gains/increase in unrealized AFS losses, which matters more under Basel III. In 1Q13, unrealized AFS gains contributed the most to the TCE ratio at The Bank of New York Mellon Corporation (NYSE:BK), Fifth Third Bancorp (NASDAQ:FITB), Signature Bank (NASDAQ:SBNY), Wells Fargo & Co (NYSE:WFC), State Street Corporation (NYSE:STT), Regions Financial Corporation (NYSE:RF) and PNC Financial Services (NYSE:PNC); all in excess of 30bps.
  • Some benefit to net interest margins as securities portfolio reinvestment rates improve, though other pressures due to low short-end. Zions Bancorporation (NASDAQ:ZION), Fifth Third Bancorp (NASDAQ:FITB), Citigroup Inc (NYSE:C), East West Bancorp, Inc. (NASDAQ:EWBC), Synovus Financial Corp. (NYSE:SNV) and Wells Fargo & Co (NYSE:WFC) saw the most pressure on securities yields in 1Q13.
  • Lower mortgage refi activity and reduced gain on sale margin, though increased MSR values, expectations of an improved purchase environment, and expense saving opportunities. In our coverage, Fifth Third Bancorp (NASDAQ:FITB), Wells Fargo & Co (NYSE:WFC), SunTrust Banks, Inc. (NYSE:STI), M&T Bank Corporation (NYSE:MTB), U.S. Bancorp (NYSE:USB), BB&T Corporation (NYSE:BBT) and Huntington Bancshares Incorporated (NASDAQ:HBAN) all had 7%-plus of their 1Q13 revenues tied to mortgage fee income.
  • Rapid changes in interest rates can impact trading results, though recent commentary has been constructive. FICC trading/debt underwriting is largest at Bank of America Corp (NYSE:BAC), Citigroup Inc (NYSE:C) and JPMorgan Chase & Co. (NYSE:JPM).
  • We expect asset quality to be benign for the intermediate term, though refinancing risk could increase, particularly for CRE. CRE as percent of average earning assets is highest at Synovus Financial Corp. (NYSE:SNV), Zions Bancorporation (NASDAQ:ZION), M&T Bank Corporation (NYSE:MTB), Wells Fargo & Co (NYSE:WFC), BB&T Corporation (NYSE:BBT) and Signature Bank (NASDAQ:SBNY).
  • Higher rates can lead to increased bank M&A activity. Mid-cap banks with a CEO over age 62 include Comerica Incorporated (NYSE:CMA), City National Corp (NYSE:CYN) and TCF Financial Corporation (NYSE:TCB).

Examining several current income statement and balance sheet factors, all else equal, we believe Bank of America Corp (NYSE:BAC), CMA, East West Bancorp, Inc. (NASDAQ:EWBC), First Horizon National Corporation (NYSE:FHN), JPMorgan Chase & Co. (NYSE:JPM), M&T Bank Corporation (NYSE:MTB), Northern Trust Corporation (NASDAQ:NTRS), Synovus Financial Corp. (NYSE:SNV) and Zions Bancorporation (NASDAQ:ZION) could be relatively larger beneficiaries of a rising interest rate environment while COF, Fifth Third Bancorp (NASDAQ:FITB), KeyCorp (NYSE:KEY), Signature Bank (NASDAQ:SBNY), State Street Corporation (NYSE:STT), U.S. Bancorp (NYSE:USB) and Wells Fargo & Co (NYSE:WFC) stand out on the other end. Still, we expect the better management teams to adapt to dynamic environments.

Impact of the 10-year Jump

With the 10-year treasury yield rising 86bps since the start of May, investors have been asking several questions on the group. Still, we note the 10-year is relatively low compared to historical standards. Of note, the current 10-year remains in the bottom decile when examining data back to 1800. Additionally, this recent back-up in the long end of the curve has not resulted in shorter-end rates like Fed Funds or 3-month Libor moving. This report examines the implications for the increase in the long-end of the curve, though we highlight that higher short-term rates, coupled with a steep yield curve and greater economic expansion, would be a more beneficial backdrop.

10 year treasury yield chart

As detailed herein, historically, a back-up in the 10-year yield has resulted in:

  • Mixed stock price performance, though better performance when accompanied by yield curve steepening.
  • A decline in unrealized AFS gains/increase in unrealized AFS losses, which matters more under Basel III. In 1Q13, unrealized AFS gains contributed the most to the TCE ratio at The Bank of New York Mellon Corporation (NYSE:BK), Fifth Third Bancorp (NASDAQ:FITB), Signature Bank (NASDAQ:SBNY), Wells Fargo & Co (NYSE:WFC), State Street Corporation (NYSE:STT), RF and PNC; all in excess of 30bps.
  • Some benefit to net interest margins as securities portfolio reinvestment rates improve, though other pressures due to low short-end. Zions Bancorporation (NASDAQ:ZION), Fifth Third Bancorp (NASDAQ:FITB), C, East West Bancorp, Inc. (NASDAQ:EWBC), Synovus Financial Corp. (NYSE:SNV) and Wells Fargo & Co (NYSE:WFC) saw the most pressure on securities yields in 1Q13.
  • Lower mortgage refi activity and reduced gain on sale margin, though increased MSR values, expectations of an improved purchase environment and expense saving opportunities. In our coverage, Fifth Third Bancorp (NASDAQ:FITB), Wells Fargo & Co (NYSE:WFC), SunTrust Banks, Inc. (NYSE:STI), M&T Bank Corporation (NYSE:MTB), U.S. Bancorp (NYSE:USB), BB&T Corporation (NYSE:BBT) and Huntington Bancshares Incorporated (NASDAQ:HBAN) all had 7%- plus of their 1Q13 revenues tied to mortgage fee income.
  • Rapid changes in interest rates can impact trading results, though recent commentary has been constructive. FICC trading/debt underwriting is largest at Bank of America Corp (NYSE:BAC), Citigroup Inc (NYSE:C) and JPMorgan Chase & Co. (NYSE:JPM).
  • We expect asset quality to be benign for the intermediate term, though refinancing risk could increase, particularly for CRE. CRE as percent of average earning assets is highest at Synovus Financial Corp. (NYSE:SNV), Zions Bancorporation (NASDAQ:ZION), M&T Bank Corporation (NYSE:MTB), Wells Fargo & Co (NYSE:WFC), BB&T Corporation (NYSE:BBT) and Signature Bank (NASDAQ:SBNY).
  • Higher rates can lead to increased bank M&A activity. Mid-cap banks with a CEO over age 62 include Comerica Incorporated (NYSE:CMA), City National Corp (NYSE:CYN) and TCB.

Stock Price Impact By Yields

Higher rates yield mixed bank stock performance. The curve matters more. The Figure below examines 15 instances over the past 20 years when the 10-year yield moved sharply higher. It also tracks the effective Fed Funds and the spread between the two. In the periods where the 10-year treasury yield rose by a relatively large amount, the BKX rose 9 times and declined 6 times. Still, it outperformed 7 times and underperformed 8 times. However, the yield curve seems to matter more. When the spread between the 10- year treasury yield and the effective Fed Funds increased more than 150bps, the BKX has increased in 5 of the 6 instances and in the 8 instances it rose less than 150bps, it has risen only 3 times (excluding the current period).

Bank Stocks And Interest rates

Unrealized Gains/Losses on Yield

AFS securities gains have dropped, which impacts Basel III tier 1 common and tangible book, but not net income.

One of the first things you learn in a basic fixed

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