With the recent slide in yields, bank stocks have come off their highs, and Bank of America Corporation (BAC) in particular has fallen by 7% since March 1st of this year. However, if you believe economic growth is expected to improve in the coming months, as I do, taking Treasury yields higher, bank stocks should continue to be great long-term investments as yields will likely boost net interest income for banks like Bank of America.
In this article, we’ll analyze where the 10-year yield needs to rise to and where yield momentum needs to move in order for BofA to make a sustained long-term move. It’s important to note that this article is not a short-term outlook for a bounce in yields or in bank stocks.
Instead, this analysis compares where yields and BofA’s subsequent stock price equivalent need to trade in order to safely conclude the long-term bullish move in both yields and BofA’s stock have resumed.
The 10-year yield and BofA:
The rising 10-year yield has been a key driver for surging bank stocks since July of last year. Higher yields typically drive up net interest income for banks since higher yields act as inflation, allowing banks to charge higher interest rates on their loans. As a result, bank stocks typically move in tandem with yields.
Subsequently, the recent fall in yields has been the key driver in the pullback in bank stocks.
Why the 10-year yield momentum is still too low for a bank rally:
Using momentum to show the next rally:
- In looking at momentum measured by the relative strength index on the bottom of the chart, we can see that every rally in yields has resulted in a break upwards in momentum (green boxes).
- The bullish breaks of the RSI trend lines (pink lines) correspond with moves higher in the 10-year yield. We can see the green boxes on RSI match up to the uptrend green boxes on the 10-year yield.
- Trend lines can be drawn for momentum indicators just like stocks. The trend lines connect…