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Do Rising Rates Help Regional Banks?

David Becker
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www.iforex.com

Treasuries fell and yields surged after the Labor Department reported a .4% increase in the Consumer Price Index (CPI) for May, last week but the trend was curtailed after the Fed announcement. After breaking out last week above 48 basis points, the 2-year turned back into a longer-term range. The move was the biggest jump since February 2013 and may signal that inflation is picking up.

Treasuries, which loathe inflation, sold off on the news and the 2-year Treasury Yield ($UST2Y) moved to its highest level of the year. Actually, the 2-year yield hit a new high for 2014 on Monday.

Overall regional banks generally perform well as the beginning of a growth cycle when interest rates begin to climb. As interest rates begin to climb, regional banks can borrow short term and lend at longer term interest rates thereby capturing the profit from the yield curve. With inflation picking up slightly, short term yields should outperform longer term yields benefiting the regional lenders.

The KRE ETF broke wedge resistance with an 11+ percent advance from mid-May to early June. KRE was overbought after this move and corrected with a small falling flag the prior five days. The surge continued on Wednesday and is challenging the flag trend line and a breakout would signal a continuation higher. The trend line break and resistance from the May highs combine to mark a support zone in 38-39 area. The price relative (KRE:SPY ratio) breaking above its May high in early June and forming a higher low with this week’s up turn.

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