At Tricio we offer ‘straight shooting’ views on economies and markets if we can. While some investment ideas, risks or views on economies can be subtle at times, experience has taught us that clients appreciate clear ideas. We like the chance of the Fed managing to engineer a soft landing in the US. The Goldilocks outcome of soft but not really bad recessionary economic activity coupled with inflation readings falling a bit further should leave the Fed set to lower rates this year and a few times in 2025. All else being equal, this should allow the 10-yr. note yield (weekly chart below) to fall below 4%. Technical objectives point towards 3% as a potential target with chart support layered at 3.8%/3.6% and 3.3% ahead of this.

The coupon curve (weekly chart below) is expected to steepen further, with a turn above 00 bp still expected over the coming months. Targets are layered from +20 bp to +100 bp depending on different scenarios, with the 2-yr. note yield potentially having to do much of the lifting over the course of this cycle. In other words, the 2-yr. note tracks (and anticipates) the fed funds rate and may overshoot easing expectations at times in this cycle, steepening the coupon curve more than may be expected at times.

This is clearly bolstering regional bank shares as the KBW regional banking index chart shows below (weekly). A steeper coupon curve would traditionally be taken as a potential profit making opportunity for banks as they are supposed to borrow short (customer deposits) and lend long (mortgages, other loans). The bigger the spread between short and long-dated rated and the more ‘money for nothing’ opportunities should be seen for lenders (apologies to Dire Straits).

Keep in mind that the healthy economic backdrop in the US should really have bolstered regional banks before, but the overhang of the March 2023 sell-off (when it became clear that some banks had forgotten how to hedge their bond holdings) has been tough to shake off. While we may be looking for new highs in this sector and see some further significant upside further out, bank ideas always require ‘elf and safety’ warnings. For some reason banks always seem to find ways to spot banana skins and slip on them. In this case, commercial real estate loans are a big warning that many analysts have been pointing out for some time now. If the US economy sours and Goldilocks is chased out of the house by big bad bears (well…) then regional banks may find bullish sentiment tailing off as well. For now though, further gains to the late 2022 high (red line) seem open, then to the all-time high from early 2022 and higher. See if the break above the falling line and 13/50-week moving averages hold as support/risk, and keep an eye on corrective pullbacks to gauge whether buyers step in on dips (down -2% so far today), or not.
Gerry Celaya, Chief Strategist
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