On Thursday, the yield curve between 2-year and 10-year U.S. Treasury bonds inverted for the first time since 2019, an economic recession indicator that has been extremely reliable over the past century.
Since the beginning of the year, Bank of America analyst Ebrahim Poonawala has been bullish on bank stocks in an environment of rising interest rates, but Poonawala said Friday that the yield curve is looking increasingly problematic for bank stock investors.
Economic Slowdown Ahead? Poonawala said the inverted yield curve is "becoming hard to ignore" and could be a sign the market is anticipating the Federal Reserve will do some real damage to the economy at some point in its current rate hike cycle.
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Poonawala said Friday that Treasury yields currently suggest the Fed will actually begin cutting interest rates sometime between mid-2023 and 2025. In fact, about a 1% cut is currently priced in from 2024 to 2026.
However, Bank of America is still projecting 3.25% Fed funds rates through the end of 2023. In addition, the firm is projecting 3.3% U.S. GDP growth in 2022 and 1.8% growth in 2023, an outlook that Poonawala said keeps him bullish on select bank stocks for now.
"While caution is warranted and the downside risks tied to the war (potential to exacerbate inflationary pressures, worsening relations between US/China) are significant, we recommend maintaining selective exposure to the group in the event where the worst-case outcomes are avoided; a near term de-escalation in the war," Poonawala said.
How To Play It: His top bank stock ideas include Wells Fargo & Co (NYSE:WFC) as well as domestic U.S. regional banks M&T Bank Corporation (NYSE:MTB), Truist Financial Corp (NYSE:TFC) and KeyCorp (NYSE:KEY). In addition, Poonawala is bullish on secular growth stocks, including Signature Bank (NASDAQ:SBNY), East West Bancorp, Inc. (NASDAQ:EWBC), SVB Financial Group (NASDAQ:SIVB), First Republic Bank (NYSE:FRC) and Western Alliance Bancorporation (NYSE:WAL).
Benzinga's Take: Rising interest rates are generally good for bank stocks because they help boost their net interest margins. However, if interest rates rise fast enough or far enough to dampen economic growth, bank stocks start to suffer from a slowdown in loan growth.
Photo by Floriane Vita on Unsplash
