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Jobs Data Sends Treasury Yields to New Highs: 5 Bank Picks

Swarup Gupta
An increase in rates widens the yield spread for banks, which in turn boosts their margins.

On Oct 5, Treasury yields soared to fresh records after wages increased once again in September. Meanwhile, job additions for August were revised significantly higher. Most importantly, unemployment plunged to its lowest level in nearly 50 years. These developments strengthened the view that the Fed would attempt to control inflation by announcing further rate hikes.

The uptrend in yields was visible earlier in the week as well. A flurry of bullish economic reports, including those on services and factory orders, has made bonds less attractive compared to their equity counterparts. An increase in rates widens the yield spread for banks, which in turn boosts their margins. Adding banking stocks to your portfolio looks like a smart option at this point.

Wages Rise Again, Unemployment Falls to 49-Year Low

According to a fresh report from the Department of Labor, the U.S. economy added 134,000 jobs in September, significantly lower than the estimated level of 183,000. This was primarily attributable to the impact of Hurricane Florence. Meanwhile, the unemployment rate declined to 3.7%, the lowest level registered since December 1969.

Additionally, average hourly earnings increased by 8 cents or 0.3% to $27.24.The increase was in line with August’s revised increase of 0.3%. The year-over-year increase in wages declined from 2.9% to 2.8%. However, the metric is widely expected to exceed 3% as firms compete to hire an ever smaller pool of workers.

Yields Spike, Economic Data Robust

Consequently, the yield on a 10-year Treasury note increased by 3 basis points to 3.227%, its highest level since May 2011. This resulted in a weekly increase of 17.1 basis points, the highest such increase since February. The yield on the 30-year note increased 4.2 basis points to 3.396%. This brings its weekly increase to 20 basis points, the highest recorded since the week when Trump won the Presidential election.

Yields had scaled higher earlier this week as well following the increase of bullish economic data. The ISM services index increased from 58.5% in August to 61.6% in September. This is the highest reading registered since the inception of the index in 2008. Also, factory orders increased by 2.3%, or $11.5 billion, to $510.5 billion in August. This is the largest monthly increase experienced since September 2017.

Our Choices

Fresh jobs data clearly indicates that the labor pool continues to tighten even as the jobs market hovers near full employment. This is likely to lead to further wage increases, causing the Fed to hike rates to combat inflationary pressures. Meanwhile, a host of bullish economic reports are boosting the attractiveness of stocks compared to their fixed income counterparts.

Adding banking stocks to your portfolio looks like a profitable option at this time. This is because these are likely to benefit from the widening of the yield spread. We have narrowed our search to the following stocks based on a good Zacks Rank and other relevant metrics.

BayCom Corp. BCML provides commercial banking products and services to businesses and individuals.

BayCom has a Zacks Rank #1 (Strong Buy). The company has expected earnings growth of 22% for the current year. The Zacks Consensus Estimate for the current year has improved by 1.1% over the last 60 days.

CBTX, Inc. CBTX is the bank holding company for CommunityBank of Texas National Association, which offers commercial banking services to businesses and professionals.

CBTX’s expected earnings growth for the current year is 25.9%. The Zacks Consensus Estimate for the current year has improved by 8% over the last 60 days. The stock sports a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Banner Corporation BANR is the bank holding company for Islanders Bank and Banner Bank, which provides banking products and services to businesses and individuals.

Banner has a Zacks Rank #2 (Buy). The company has expected earnings growth of 25.9% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.2% over the last 30 days.

Cadence Bancorporation CADE is the bank holding company for Cadence Bank, N.A which offers banking products and services to individuals and businesses.

Cadence has a Zacks Rank #2. The company has expected earnings growth of 36.1% for the current year. The Zacks Consensus Estimate for the current year has improved by 0.6% over the last 30 days.

First BanCorp. FBP is the bank holding company for FirstBank Puerto Rico, which offers a range of banking products and services.

First BanCorp has a Zacks Rank #2. The company has expected earnings growth of 23% for the current year. The Zacks Consensus Estimate for the current year has improved by 4.2% over the last 30 days.

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First BanCorp. (FBP) : Free Stock Analysis Report
 
Banner Corporation (BANR) : Free Stock Analysis Report
 
Bay Commercial Bank (BCML) : Free Stock Analysis Report
 
CBTX, Inc. (CBTX) : Free Stock Analysis Report
 
Cadence Bancorp (CADE) : Free Stock Analysis Report
 
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