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The 10-Year Treasury May Move Sharply Lower. That's Bad News For Bank Stocks

By Michael KramerMarket OverviewMay 15, 2020 04:56AM ET
www.investing.com/analysis/the-10year-may-move-sharply-lower-thats-bad-news-for-the-bank-stocks-200524732
The 10-Year Treasury May Move Sharply Lower. That's Bad News For Bank Stocks
By Michael Kramer   |  May 15, 2020 04:56AM ET
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This article was written exclusively for Investing.com

The economic landscape is eroding quickly, and that's causing inflation rates and the expectation for future inflation to plunge. It paints a murky picture for interest rates, and with traders betting on the possibility of negative interest rates out of the Federal Reserve in 2021, yields on the 10-year Treasury could be heading toward 0%.

Should that happen, the one sector that could suffer are the banks. This group has been pounded in recent weeks, with the Financial Select Sector SPDR® Fund (NYSE:XLF) falling a stunning 11% since April 29. Overall, the year has been dismal for the group, with the ETF down by more than 30%. Yes, it can still get worse.

Inflation Reading Plunge

The latest reading for the consumer price index and the producer price index both plunged in April. The producer price index fell by 1.2% year-over-year, its steepest decline since 2015. Meanwhile, the consumer price index increased by only 0.3% year-over-year, its smallest also since 2015. Even worse, Fed Fund futures for March 2021 at one point this week were pricing in -0.05% for the benchmark interest rate next year.

US PPI 2010-2020
US PPI 2010-2020

But the prospects for inflation grow worse because the 10-year breakeven inflation expectations have fallen to 1.07%, their lowest levels since 2008. At the same time, the velocity of MZM has fallen to its lowest level ever at 1.23, and is likely to fall even further in the second quarter, as money printing has exploded higher, and GDP has crashed.

10-Year Could Fall Towards 0%

It all indicates that US 10-year Treasury rates may still have further to fall in the months ahead. The 10-year has been challenging a downtrend in recent days and appears to have failed despite multiple attempts to break out. A drop meaningfully below 55 basis points could result in the 10-year heading towards 0%. The pattern that appears to be forming in the chart is a descending triangle, a bearish pattern, and a break of 55 basis points on the chart would confirm the pattern.

10Y UST Daily
10Y UST Daily

 

Banks Stock May Drop

Should that happen, the bank stocks could suffer even more as interest income declines even further. Additionally, a sharp decline in interest rates would paint a gloomy outlook for an economic recovery and the bank stocks.

The XLF ETF is showing signs of further decline with a bearish technical pattern that has formed, known as a double top. The ETF broke below a critical level of support on May 13 at $21.20, all but confirming the pattern. The ETF has tried to recover from those losses on May 14, but to this point, it has been unable to reclaim that price successfully. It would indicate that the ETF falls even further, perhaps back to its March lows.

XLF Daily
XLF Daily

If the economic scenario continues to worsen, then it seems likely that the banks can suffer as rates fall to even lower levels. While it may seem unimaginable to many for rates to sink further, the harsh reality of it is that US yields, although low by our historical standard, are rather high when compared to the rest of the world, despite the spreads shrinking in recent months. Therefore, if inflation and the economy continue to struggle, not just here in the US, but around the world, it seems likely that this scenario could play out.

Only time will tell just how deep the economic fallout of the coronavirus pandemic will be, but based on recent data points, it appears it may be the worst we have seen in about 90 years.

The 10-Year Treasury May Move Sharply Lower. That's Bad News For Bank Stocks
 

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The 10-Year Treasury May Move Sharply Lower. That's Bad News For Bank Stocks

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Comments (6)
Bahi Ghubril
Bahi Ghubril May 15, 2020 11:15AM ET
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One wonders if it's bank stocks driving 10yr yields lower or vice versa?!   Or probably both being driven lower by underlying fundamentals.  Good article, just the title should be amended since it's the 10yr yield / rates that's going lower, not the 10yr treasury.
Dee Morris
Dee Morris May 15, 2020 8:33AM ET
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Thanks for the very informative article. In regards to the 10yr, does this possible future drop in the 10yr also affect the lowering of mortgage interest rates? And if our jobs numbers continue to be worse next month will the 10yr also be pushed further to "0"? Yesterday, the Fed stimulus during the afternoon U.S. trading session helped the 10yr gain some green, but again this morning it is establishing further losses. I have noticed after a 2-3 day market drop the Fed will try to rescue the 10 yr, but this Fed move appears to not be beneficial due to the 10 yrs "heading to "0" movement"-your thoughts. Thank you.
Jay Khaye
Jay Khaye May 15, 2020 8:25AM ET
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As if the FED rate has anything to do with how much interest the banks charge.  Keep trying Junior.
Dee Morris
Dee Morris May 15, 2020 8:25AM ET
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Yes Jay, in the U.S. the Fed rates helps the banking institutions stay solvent. Are you from India or some other country outside of the U.S.? Because if you are, our financial systems are very different.
Jay Khaye
Jay Khaye May 15, 2020 8:25AM ET
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Dee Morris    Your reply has nothing to do with my comment.  Where are you from Indonesia?
Dee Morris
Dee Morris May 15, 2020 8:25AM ET
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I am in the U.S. You don't appear to be in the U.S..
Narjes Karimi
Narjes Karimi May 15, 2020 7:54AM ET
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hi can you explain about for working in the bitcoin?
Narjes Karimi
Narjes Karimi May 15, 2020 7:54AM ET
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hi can you explain about for working in the bitcoin?
Curtis McGary
Curtis McGary May 15, 2020 7:49AM ET
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Good read ty now i can get some long puts out
 
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