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Yield on US 10-Year Treasury Note Hits 3%: 5 Top Bank Picks

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Yield on US 10-Year Treasury Note Hits 3%: 5 Top Bank Picks
The increase in government bond yield can primarily be attributed to expectations of higher economic growth in the third quarter of 2018.
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On Sep 14, the yield on benchmark 10-year U.S. Treasury Note crossed 3%. The increase in government bond yield can primarily be attributed to expectations of higher economic growth in the third quarter of 2018. Moreover, job market data for August revealed a significant surge in the hourly wage rate which has once again fanned inflationary apprehensions.   Strong fundamentals of the U.S. economy may lead to higher interest rated either in the form of Fed rate hike or higher yields on government bonds.

However, a hike in interest rate will raise the cost of funds, which in turn will enable the financial sector, especially banks, to widen the spread between longer-term assets, such as loans, with shorter-term liabilities, thus bolstering the sector’s profits. Consequently, investment in banking stocks with a favorable Zacks Rank and strong growth potential will be a prudent move.

10-Year Treasury Note Yield Rises

On Sep 14, 10-year U.S. Treasury Note yield hit 3% for the first time since Aug 2. The spike in government bond yield came immediately after the Commerce Department revised U.S. retail sales data for July from previously stated gain of 0.5% to 0.7%. Notably, consumer spending constitutes more than two-third of U.S. GDP. Consequently, higher consumer spending will lead to higher GDP.

On Aug 22, minutes of the Federal Reserve's meeting indicated widespread support for another interest rate increase in September to cool down the strong U.S. economy. Consequently, higher interest rate, either in the form of a hike in benchmark rates or higher yields on government bonds will bolster the financial sector. 

Higher Yields on Government Bonds to Continue

Several industry researchers have forecasted that yield on 10-Year U.S. Treasury Note is likely to vary within the range of 3.5% to 3.75% by the end of 2018. Strong U.S. economic indicators like manufacturing index, industrial production, capacity utilization, U.S. consumer sentiment and confidence index have restored investors’ faith on riskier assets like equities.

A healthy U.S. economy and a robust job market helped market participants to largely ignore ongoing trade conflicts between the United States and China. A shift in investors’ preference from bond to equities will result in lower price of bonds which will eventually lead to higher bond yields.

Fed Applauds Economic Growth and Rate Hike

On Sep 12, St. Louis Federal Reserve Bank president James Bullard applauded President Trump’s business friendly policies which spurred economic growth and lifted productivity. On the same day, a key Federal Reserve official, Gov. Lael Brainard stated that inversion of the yield curve between 3-month and 10-year US Treasury Note may not always indicate an impending recession.

Consequently, an inverted yield curve will not be a hindrance to the central bank raising short-term interest rates in order to check inflation. 

Our Top Picks

Strong earnings, massive tax cuts and solid economic data are likely to boost consumer spending in the coming months, which will result into higher economic growth and price level. This will lead the market interest rate to rise. Higher interest rate will eventually aid the banking industry. Consequently, banking stock stocks are lucrative investment options at the moment.

We narrowed down our choice to five banking stocks with a Zacks Rank #1 (Strong Buy) and solid growth potential. You can see the complete list of today’s Zacks #1 Rank stocks here.

The chart below depicts price performance of our five picks in the last three months.



Blue Hills Bancorp Inc. BHBK is the holding company for Blue Hills Bank, a full service, community bank. It provides consumer and commercial deposit and loan products. The company has expected earnings growth of 78.6% for current year. The Zacks Consensus Estimate for the current year has improved by 8.7% over the last 60 days.

Northrim BanCorp Inc. NRIM is a full-service commercial bank that provides a full range of personal and business banking services. The company has expected earnings growth of 39.7% for current year. The Zacks Consensus Estimate for the current year has improved by 15.4% over the last 60 days.

Popular Inc. BPOP is a diversified, publicly owned bank holding company primarily operating in Puerto Rico, U.S. Virgin Islands, the British Virgin Islands, and New York. The company has expected earnings growth of 75.4% for current year. The Zacks Consensus Estimate for the current year has improved by 9% over the last 60 days.

The First Bancshares Inc. FBMS operates as the holding company for The First, A National Banking Association that provides general commercial and retail banking services. The company has expected earnings growth of 27.8% for current year. The Zacks Consensus Estimate for the current year has improved by 4.7% over the last 60 days.

Bank of Marin Bancorp BMRC provides a range of financial services primarily to professionals, small and middle-market businesses, individuals, as well as not-for-profit organizations in California. The company has expected earnings growth of 33.2% for current year. The Zacks Consensus Estimate for the current year has improved by 5.6% over the last 60 days.

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Blue Hills Bancorp, Inc. (BHBK) : Free Stock Analysis Report
 
Popular, Inc. (BPOP) : Free Stock Analysis Report
 
The First Bancshares, Inc. (FBMS) : Free Stock Analysis Report
 
Northrim BanCorp Inc (NRIM) : Free Stock Analysis Report
 
Bank of Marin Bancorp (BMRC) : Free Stock Analysis Report
 
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