Banks are a major beneficiary of rising long-term bond yields. They borrow
at the short end of the yield curve where the Federal Reserve has set its
benchmark interest rate at 0% to 0.25%. And they lend–for mortgages, for
example–at the long end of the yield curve. The yield on the 10-year
Treasury, the benchmark for many mortgages, ended around 1.73% on Friday.
With economic growth looking strong for 2021 and with long-term yields
likely to end the year even higher from the current 1.73%, I think it makes
sense to add exposure to bank stocks to a portfolio. I think bank stocks
are also likely to show less volatility than bonds themselves since the
earnings advantage that higher yields offer to banks won't go away with a
week or two of fluctuations in yields.
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