Keystone's 2-10 Spread Indicator

Note and bond yields jump higher so the interest rate sensitive sectors are hit such as utilities, telecom and REIT's.  At the same time a steepening yield curve benefits banks so the financial sector receives a bump higher.   Keystone uses a 2-10 spread of 255 basis points to signal the all-clear for banks.  When the spread between the 2-Year Note and 10-Year Note is over 255 basis points, the yield curve is sufficiently steep to provide the banks with hefty profits. Under 255 basis points and bankers have nothing to be happy about since the economy is in a slow growth environment with lackluster business activity, like now. Traders are tripping over themselves to buy banks these days but the move may be premature. If the spread increases over 255, they will be correct. If the spread stays under 255, the banks will likely retreat from current levels moving forward.

At the market bottom in March-April 2009, the 2-10 spread was about 200 signaling the ongoing turmoil. In December 2009, the spread was up to 288 with drunken bankers toasting Chairman Bernanke as the yield curve steepened. The spread was 270+ into summer 2010 when another deflationary scare occurs dropping the spread under 255.  Chairman Bernanke saved the equity markets with QE 2 in August 2010.  In early 2011, the spread is back above 255 favoring the bankers but then in the summer of 2011 the spread falls under 255 and remains under ever since. What is the spread now?

The 10-year yield continues to climb higher tagging 2.74% and now printing 2.69% at this writing.  The 2-year yield is 0.40%. The spread is 269-40 = 229.

The 229 is quickly approaching the 255 level but not there as yet.  If the 10-year yield climbs above 2.95%, that would signal the all-clear for the bankers. So put this one on the watch list moving forward. The talk and bullishness around banks is not yet justified and likely would not be until the 10-year climbs to 3%-ish and higher, so the early giddiness appears misplaced. Further, the financial charts are negatively diverged or developing negative divergence, from overbot conditions, pointing to potential trouble ahead for the banking sector.