Yield curve steepens, banks should benefit

Today we have an interest rate environment that banks should like. If history means anything, they will make money and recaptilize themselves further through profits. The Treasury yield curve ended the market day with a one month yield of .o8%, six month of .35%, one year of .62%, two yer of 1.42%, ten year of 3.91%, and thirty year of 4.65%. That's a steep yield curve, on an absolute basis and even more so on a relative basis.

Talk of foreign institutions not lining up to buy Treasuries are, at the moment, untrue. They are simply doing the majority of their buying at the 3 to 5 year part of the curve and significantly moderating their focus on ten year or longer. That's what's shaping interest rates, no grand Treasury scheme, just investor demand. In the long run who knows where this leads. In the short run plain old retail and small commercial banks have just what they like, a market where they pay little for their deposits and get multiple times more interest on their loans. Bigger banks get their take from the retail side plus a trading market in fixed income with volatility but the safety of the steep yield curve, barring some excessive and misguided risk taking.

This can give a cushion for the expected growing losses on credit card portfolios and an increase in commercial real estate delinquencies and charge-offs. Get that rat through the snake and profitability will rise sharply. It would be wishful thinking to expect this to be imminent, but the scenario is currently a good one, on the interest rate front, for putting the banking system on solid ground as capital strengthens through rising revenues and profits.