Trader Talk with Bob Pisani
Remember the bull narrative: The Fed and the central banks have our back, the tariffs are going to go away, the Chinese are going to stimulate their way out of the slowdown and the Europeans…well, this is probably the bottom in the lousy economic numbers.
While we do have a dovish Fed, that factor is now priced into the market. The president has made clear there may be no immediate reduction in tariffs, and the European manufacturing data — particularly Germany — was so bad that 10 year bond yields over there went to zero.
The low interest-rate environment is having an effect on the markets. For the past several weeks, new highs on the SP 500 have been exclusively interest-rate sensitive stocks of REITs (Equity Residential, Essex Property, Kimco, Mid-America Apartment Communities) and utilities (NextEra, American Electric Power, Exelon, Xcel).
While many worry about how a flat yield curve affects banking business, for most regional banks short-term interest rates are the most important determinant, and with 2-year yields essentially at their lowest levels in 12 months, that’s a problem.
A bank’s loan book would typically consist of a mix of commercial industrial loans, most of which are tied to a shorter-term variable rate. Fixed-rate loans like auto loans are also tied to medium and shorter-term rates. Mortgage loans are tied to longer term instruments like the 10-year, but they are typically only 20 percent of the book of most regional banks.
Bottom line: Low rates are both a blessing and a curse for investors.
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