A brief steepening of the yield curve two weeks ago was enough to send U.S. financial stocks sharply higher, leading the S&P 500 in gains at times, and fueling talk that perhaps the beleaguered sector is finally going to break out.
In the past week alone, investors poured almost $600 million into the Financial Select Sector SPDR Fund (XLF) as 10-year Treasury yields inched ever so slightly higher. That’s noteworthy, because the prevailing flows trend for XLF this year has been negative, with the $22 billion fund now sitting with $3.5 billion in net redemptions year to date.
Other financials ETFs, particularly those focused on banks, have also struggled to find new assets despite what’s been a relatively good performance, all things considered.
Biggest Financials ETFs Outflows YTD
|Ticker||Fund||YTD 2019 Net Flows ($M)||2019 AUM ($M)|
|XLF||Financial Select Sector SPDR Fund||-3,552.08||21,923.42|
|KRE||SPDR S&P Regional Banking ETF||-1,588.92||1,620.86|
|KBE||SPDR S&P Bank ETF||-1,332.08||1,483.15|
Measured by the performance of XLF, financials have lagged the S&P 500 throughout the year (as measured by the SPDR S&P 500 ETF Trust (SPY)). But that underperformance isn’t as bad as some had expected given the interest rate environment.
The yield on the 10-year Treasury is down about 1% this year. The yield curve has been very flat—and at times inverted—and the Federal Reserve has already lowered rates twice in 2019. The shape of the curve is very important, particularly for smaller banks, because it impacts their ability to turn a profit. When the curve is this flat, banks’ net profit margins are squeezed.
Lower rates have helped bring mortgage rates down, and demand for loan refinancing and new mortgages has increased in the past year.
Unless mortgage generation is part of a diversified business line, there’s little benefit to smaller banks focused on retail lending, where lower rates may allow for some growth in volume as people take on loans, but margins will shrink.
Treasury Yield Curve As Of Oct. 10, 2019
|Date||1 Mo||2 Mo||3 Mo||6 Mo||1 Yr||2 Yr||3 Yr||5 Yr||7 Yr||10 Yr||20 Yr||30 Yr|
Source: U.S. Dept. of Treasury
There is also the overhanging trade dispute with China, which has impacted all sectors of the market.