Today, bank stocks are in focus for investors. Indeed, most of the major U.S. banks are higher today, by a similar margin.
Bank of America (NYSE:BAC), JPMorgan (NYSE:JPM), Goldman Sachs (NYSE:GS) and Wells Fargo (NYSE:WFC) are all higher by approximately 3% at the time of writing. These synchronized moves seem to indicate a similar catalyst is at play for these stocks.
It appears two key catalysts are driving bank stocks higher today. Let’s dive into what investors are pricing with these lenders right now.
Bank Stocks Higher on Positive Jobs Report and Higher Treasury Yields
The first surrounds a positive jobs report beat. The U.S. reported 943,000 jobs were added in July, beating economist predictions. This level of job growth is impressive and has boosted investor confidence in stocks that are economically sensitive. As it happens, big banks fall into this category of stocks.
As employment numbers rise and the economy improves, banks benefit from higher lending and improved credit quality. This pandemic has limited the extent to which banks can lend money to qualified borrowers. A shift toward higher employment signals banks will not only be able to lend more (and therefore make more money) but also that they will be able to do so to borrowers with better credit. More high-quality loans are what every investor in big banks is after. Accordingly, this data is hugely bullish for bank stocks today.
Secondly, this jobs data has spurred U.S. Treasury yields higher. This is because higher bond yields signal to the market that the Fed may start easing bond purchases. Less stimulus may be necessary to “juice” the economy. Accordingly, the benchmark 10-year rate, often referred to as the “risk-free rate,” jumped seven basis points to 1.29% today. Additionally, the 30-year Treasury yield also jumped seven basis points to 1.94%.
Higher interest rates aren’t generally good for stocks, particularly high-growth stocks. This is because the risk-free rate is a key determinant of how cash flows are discounted over time. When financial models are adjusted with higher risk-free rates, valuations (and therefore stock prices) go down.
However, banks are unique in this sense, in the fact that higher bond yields can result in higher valuations. This is because higher long bond yields (10-year and 30-year, for example) steepen the yield curve. Short-term bonds (one-month and three-month, for example) are still near zero. This means the bank can borrow at very low rates (shorting short-term bonds) and lend out at higher rates (such as 30-year mortgages or revolving lines of credit). This is what’s known as the net interest margin (NIM) for banks, and how they make money.
On the date of publication, Chris MacDonald did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.
