As long-term treasury yields rise and fears of higher inflation creep into investors’ minds, stock prices in several popular sectors are under pressure. When bond yields rise, it can slow some growth and tech stocks as their future cash flows become less valuable. Additionally, higher bond yields offer investors a way to earn more from safer assets. This raises expectations on stocks, for which the bar was already set quite high.
In contrast, companies in certain sectors are benefiting from the rise in bond yields. Bank stocks tend to rise as the 10-year Treasury yield rises, as the interest rates on many of their loans are tied to this benchmark (and other longer-term bond yields). which tend to evolve in phase with it).
These two bank stocks should benefit greatly from the rise in bond yields and should also be able to do well with some inflation. And as an added bonus, they also have dividend yields now significantly above the average. S&P 500 actions.
Assets of nearly $ 88 billion Comerica (NYSE: CMA) is probably encouraging as long-term returns increase, as this trend is incredibly beneficial to its bottom line. The Dallas-based bank said in its second-quarter regulatory filing that a 1% increase in the federal funds rate – what the Federal Reserve charges banks for overnight lending – would result in a 10% increase in its net interest income over the next year. Now, the Fed has not raised the federal funds rate – yet – since lowering it to virtually zero at the start of the pandemic. However, a bank so sensitive to short-term rates will also benefit from a rise in long-term rates.
That’s because Comerica has a very strong deposit base, and nearly $ 39 billion of its deposits – more than half of it – are non-interest bearing, which means they cost the bank no interest to maintain. . Ideally, these deposits are stickier – its account holders should largely stay with Comerica even as interest rates rise and the war for deposits escalates. We also know that the vast majority of the bank’s loan portfolio, which is full of commercial loans, is tied to floating interest rates. Therefore, its profits on these loans will increase when rates rise.
When banks can contain the amount of interest they pay and increase the interest rates they collect on loans, they naturally make more money. And with a quarterly dividend of $ 0.68 to the share price of $ 80.50 at Thursday’s close, Comerica is currently offering a good 3.3% dividend yield that investors can collect while waiting for those profits. rising are coming.
2. Citizens Financial Group
Citizens Financial Group (NYSE: CFG) will also benefit as inflation escalates and long-term bond yields rise. In its second quarter regulatory filing, the Rhode Island-based bank claimed that if the Federal Reserve quickly hiked the fed funds rate by 1%, it would realize an additional 11.3% in net interest income over the next year. year. If the fed funds rate were to rise 1% on a more gradual basis – a more likely scenario – the $ 185 billion asset bank would make another 5.4% more net interest income.
More than half of the citizens’ loan portfolio is tied up in variable rate loans, and the bank continues to reduce its deposit fees. In addition, its proposed acquisition of 80 HSBC branches in the United States will come with $ 9 billion in very cheap deposits. And like Comerica, Citizens’ dividend at the current stock price returns almost 3.3%.
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