Regional Bank ETF ‘Flattened’ by Falling Treasury Yields

ETF Trends

A regional bank ETF that has attracted more than $600 million the past two months sat out the move higher in stocks this week as the Treasury yield curve flattened a bit.

SPDR S&P Regional Banking ETF (KRE) was on track for a weekly loss of nearly 2%, although the fund was higher in afternoon trading Friday following a four-day losing streak. The S&P 500 was set for a weekly advance of more than 2%.

Since May 10, KRE has seen $613.6 million of new cash move in the door, according to IndexUniverse data. [Regional Bank ETF: Leader Turning Laggard?]

Chris Hempstead, director of ETF execution services at WallachBeth Capital, said sellers emerged in KRE on Thursday when the ETF shed nearly 2%. The regional bank ETF lost ground Thursday even though the Dow rallied almost 170 points after Federal Reserve chief Ben Bernanke said the central bank would keep short-term rates near zero for the foreseeable future.

KRE traded more than 10 million shares on Thursday, its highest volume day of 2013.

“Note that the KRE has seen quite a bit of inflow lately … so a modest pullback in assets may not be much of a ‘tell,’” Hempstead said in a note.

The regional bank ETF seems to have attracted investors looking for sectors that stand to benefit from rising rates. Also, the fund’s recent rally may have also attracted momentum chasers.

Yields on the 10-year Treasury note have pulled back somewhat this week after climbing above 2.7%.

Also, the shape of the Treasury yield curve has flattened this week. For example, iPath US Treasury Steepener ETN (STPP) is down nearly 4% this week after a strong rally since early May that seems to have helped regional banking ETFs.

When the yield curve steepens, it means the spread between yields on short-term bonds and long-term bonds is increasing. When the curve flattens, then the gap is narrowing.

“[R]egional banks are not immune to changes in the shape of the yield curve. A flatter yield curve reduces the spread between the rate at which banks can borrow and lend because they fund most long-term loans through short-term deposits,” according to a Mornignstar analyst report on KRE. “A steepening yield curve tends to have the opposite effect. So, investors in KRE should have a strong risk tolerance and a belief on a banking-sector recovery and a steepening yield curve.”

SPDR S&P Regional Banking ETF

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iPath US Treasury Steepener ETN

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Full disclosure: Tom Lydon’s clients own KRE.

The opinions and forecasts expressed herein are solely those of John Spence, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.

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