Banks – Canary in the coal mine?

At Tricio we look at charts in order to gauge investor sentiment and behaviour.

We published a blog on Monday, 12^th January 2026, suggesting that if investors turned away from the ‘TACO’ trade view and started to be concerned about Trump policies having consequences, then US government bond yields might give an early indication of this change in sentiment.

It could be argued that if the risk is that inflation runs ‘hot’ in 2026+ then stocks should do well as shares can climb in inflation cycles. The historical risk for shares though when inflation rises is that central banks raise rates so high in a bid to constrain price pressures that the economy doesn’t just slow down, but a recession (or worse) follows, sending stocks into a tailspin. If a ‘Trump’ Fed doesn’t raise rates that much, then stocks could be in a sweet spot of low funding rates (fed funds out to 2-yr note yields would be lower than they ‘should be’). The higher bond yields, if seen, would see the coupon curve (yield spread between 10s and 2s) steepen further, which should benefit banks. All good so far, so why worry? The balancing act of ‘good inflation’ vs. higher bond yields hitting stock market investor sentiment at some stage is a difficult one. But our view is that if inflation does run higher than it ‘should’, then bond market investors will demand a higher premium and bond yields will rise to the point where equity market valuations come under pressure – sending shares into a tailspin.

The stock market gains over the last two years have been really strong in the US. Part of the reason for this is the drop in short rates since early 2024 (green yield curve on the chart below). The green curve from January 2024 shows that medium to long-term bond yields were looking ahead to a slowing economy and lower bond yields. The orange yield curve from January 2025 shows that the Fed did lower rates in 2024, but the economy was holding up and inflation, while lower, was not falling very fast by then. The blue yield curve shows current yields – the Fed has resumed lowering rates and the market is looking for inflation to remain subdued and the economy to hold steady or slow down. The risk though is that if the bond market turns sour, the 2-yr. note yield may stick around 3.5% or follow the fed funds rate lower if the Fed continues to lower rates. But medium to long-term bond yields may surge again.

This sort of steeper yield curve may not be that good for banks if the economy comes under pressure. The KBW NASDAQ Bank Index (weekly chart, semi-log with 13 and 50-week moving averages, below) shows a strong uptrend with a new all-time high made last week. The break above the falling blue line last June (bouncing from the Trump tariff April drop) was very bullish. A pullback to this line (and 50-week moving average) near 140/138 would be a test of the breakout, if seen. Failure to hold this line/average would leave the April low near 99.60 at risk of being tested, with rising channel support lines important below this near 87/80. We are not looking for such a deep selloff, but it is worth watching to see if the push to new highs continues, or if the risk of higher bond yields hits banks, the potential canary in the coalmine.

Regional banks are worth keeping an eye on as well, with the KBW Nasdaq Regional Banking Index (KRX, weekly semi-log chart below) serving as a proxy for this sector. The early 2022 high has not been broken yet so bullish sentiment is not as extended here. Watch the 50-week moving average near 118 as support to hold ahead of rising trendline support near 102.50, with long-term channel support just above 74. Again, we are not looking for such a deep pullback yet, but are wary of Trump’s actions having consequences.

Keep in mind that the backdrop for banks – looser regulation, lower rates and an economy that is still showing strong growth has been good for some time. We liked banks a lot when the coupon curve was starting to steepen, but have been worried about ‘banana skins’ for a few quarters now. Watch bond yields, and see if bullish bank sentiment starts to come under pressure.

Gerry Celaya, Chief Strategist