Sunday, June 11, 2017
YC2YR 2-10 Yield Spread (Yield Curve) and XLF Financials Weekly Charts
Banks make lots of money when the yield curve steepens since they can borrow at low rates and lend out money receiving high rates. A steeper yield curve causes traders to buy banks with both hands while a flattening yield curve means trouble ahead for banks. A flattening then inverted yield curve (2-year yield above the 10-year yield) indicates a recession ahead. The 10-year yield is at 2.20% and 2-year yield is at 1.33% for a 2-10 spread at 87 basis points.
Look at the intense flattening of the yield curve from mid 2015 to mid 2016. The banks obviously underperformed during that period printing lower lows and lower highs. The yield curve attempts to stabilize in the summer last year and the banks stabilize. Investors begin sniffing out a potentially rising yield curve and higher Treasury rates ahead and begin nibbling on the banks on the long side.
In early November last year, Trump wins the presidency. His Goldman Sachs henchmen Mnuchin and Cohn are in the back room shredding banking regulations clearing the road to more greed ahead. President Trump plans on greatly reducing financial regulations and will allow banks to increase leverage. After all, Goldman Sachs and the other investment banks want to make more money and need their government stoolies to get the job done. Humorously, nothing will go wrong with more leverage in the investment banks, right? (40 to 1 leverage sunk Lehman Brothers in 2008 sending the financial crisis into a tailspin.)
The 10-year yield shot higher late last year and the usual pundits were proclaiming 3% and higher. With the universal consensus touting this target you knew it would not happen, and it did not. The 10-year yield drops and compresses the yield spread flattening the yield curve this year. Note that the yield curve leads the banks. The financials peaked in February after the yield curve had already peaked in December.
Every time the Whitehouse mentions that they are working on regulations the banks pop higher. So if Mnuchin and Cohn want to reward their former colleagues at GS and other investment banks with more profits, they simply grab a microphone and tout cuts in financial regulations. It is so easy for the privileged elite class to make money and line their pockets with cash.
The XLF continues to play out with a H&S pattern (purple bars) but the neckline has not yet failed at 23. If 23 fails, the price target at 21-ish is on the table. The XLF shot higher last week and is now printing a second right shoulder morphing into a hunchbacked Quasimodo H&S. Financial bulls win big with the XLF above 25. Bank bears win big if XLF fails under 23 below the H&S neckline.
Bank bulls win big if the YC2YR stops its slide and moves higher reflecting a steepening yield curve. Bank bears win big if the yield curve continues lower. Investors bot banks with both hands last week expecting a steeper yield curve. The bank bulls will be rewarded if the 2-10 spread moves above 90 basis points, then above one hundo, then 110 and so on. What will all these big-time investors and traders do if the yield curve falls below 80 bips? This information is for educational and entertainment purposes only. Do not invest based on anything you read or view here. Consult your financial advisor before making any investment decision.