(Repeats story first published Friday with no changes to text)
By Sinead Carew
March 10 Bank shares have been the runaway
winners of the post-election U.S. stock market boom as investors
wagered that higher interest rates, lighter regulation, lower
taxes and faster economic growth would boost profits for
Up 32 percent since the election of Donald Trump, the S&P
500's bank index has outpaced the wider market's gain
by roughly 3-to-1. Now, however, a changing dynamic in the bond
market as the U.S. Federal Reserve gears up to raise interest
rates at a faster pace than many had previously expected is
beginning to give pause to some early bank stock bulls.
With another strong U.S. jobs report in the books, the Fed
is widely expected to raise overnight interest rates on
Wednesday, and is now seen delivering three rate hikes in
Rising rates can boost bank profits, but bank profitability
also hinges on the difference between short-term rates, like
those set by the Fed and which tend to mark the cost for banks
to acquire their funds, and long-term rates, which serve as
benchmarks for what banks charge their customers for loans.
When that difference, or spread, is large, bank profits can
rise rapidly. When it narrows, or flattens, profit growth can
At issue now is what some investors see as a growing risk of
a flattening yield curve under a more aggressive rate-hike path
by the Fed. Forwards pricing for 2- and 10-year Treasury yields
suggests the spread between them will narrow to about 93 basis
points by year-end from the current 122 points.
That is why Jeffrey Gundlach, chief executive officer at
DoubleLine Capital and an early buyer of the Trump rally, said
he has sold his financial stocks.
"When the Fed tightens more than once a year, historically
it is very consistent with a flatter curve," Gundlach said. "The
yield curve won't help the sector."
In the month after the Nov. 8 U.S. Presidential election the
S&P 500 bank index rose 24 percent. Since then the stocks have
risen 5.7 percent as many investors awaited concrete signs of
regulatory and tax reform.
"Post-election, that was the easy money on financials right
there," DoubleLine's Gundlach said.
MORE THAN JUST THE CURVE
To be sure, the bank rally has been grounded on more than
just rate hike expectations and yield curve forecasts. Investor
interest has also been stoked by assumptions about Trump's
agenda in Washington.
Investors have been betting that Trump's promises of tax
cuts would boost consumer spending and company profits, which
would drive loan demand. Meanwhile, his promise to slash
regulations could also cut compliance costs and allow banks to
expand their loan portfolios more rapidly than possible under
restrictions imposed following the financial crisis.
That is among the reasons why David Lebovitz, global market
strategist at J.P. Morgan Asset Management, still expects more
gains for financial stocks.
Even if regulatory and tax reform looks like it will take a
long time, investors will likely be patient as long as Trump's
administration provides more specifics on its plans including
timetables, Lebovitz said.
But he cautioned that "disappointment on the policy front is
the biggest risk" to stocks right now as investors have priced
in policy changes already.
Paul Nolte, portfolio manager at Kingsview Asset Management
in Chicago, said that the bank sector's outperformance may be
"done" but stopped short of calling for a correction.
"I'm not sure investors are looking at the shifting yields
and market conditions. It seems to be buy and worry about the
'why' later," he said.
(Additional reporting by Jennifer Ablan and Richard Leong in
New York.; Editing by Dan Burns and Meredith Mazzilli)