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Financial Benefit from Higher Yields

David Becker
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Financial Benefit from Higher Yields

Financial stocks are starting to show upside leadership as bond yields are starting to rise. Banks usually benefit from rising bond yields because they can charge higher rates for their loans. Two other financial groups have actually done better than banks this week. They include brokers and life insurance companies. There is a good reason why insurers benefit from higher rates. They invest three-quarters of their premiums in Treasury bonds. As a result, they receive lower income payments when bond yields are low. Higher yields allow insurers to reinvest maturing bonds in their portfolio in higher yielding bonds.

Goldman Sachs (NYSE:GS) is one of the leaders in the investment services group. The stock is traded above its 2009 peak Thursday to hit a new seven-year high. There is a robust correlation between yields and the stock price. Falling bond yields between 2008 and 2012 coincided with a weaker stock performance. It was not until 2012 when bond yields started climbing that the stock started doing better. The 100-week Correlation Coefficient between the two has been positive since 2008 and has current reading above .75. It is no coincidence that this month’s upturn in the bond yield has coincided with an upside breakout in the stock. The MACD on GS generated a buy signal as the spread (the 12-day moving average minus the 26-day moving average) crossed above the 9-day moving average of the spread. Two other strong leaders in the group are Charles Schwab (NYSE:SCHW) and TD Ameritrade (NYSE:AMTD) .

With the dollar surging, the Japanese yen has tumbled to the lowest level in six years. A falling yen is bullish for Japanese stocks. The Japanese Nikkei Index is up more than 1% Friday and is trading at the highest level since January.

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