The Federal Reserve Bank is widely expected to hike interest rates tomorrow for the fourth time since December 2015. Both the 10-year yield and bank stocks like Bank Of America Corporation (NYSE:NYSE:BAC) have corrected lower following the last three Fed hikes. Bank of America's stock price is heavily influenced by yields since the bank's loan book is comprised of a substantial amount of variable rate loans.
Although the market is on Fed watch to see if Yellen and company hike rates, the verbiage following the meeting will be more important since it may contain indications of winding down the enormous $4.5T Fed balance sheet.
The Fed Chair, Janet Yellen, is unlikely to make any bold statements about balance sheet reduction since Yellen has stated many times that the Fed will go about hiking at a gradual pace.
It may seem surprising (at least it was to me) that the 10-year yield has fallen in the days following the last three Fed hikes. As a result, bank stocks like Bank of America have corrected in lock step.
If you follow my articles on Seeking Alpha, you know that my writing centers around investment risk management. Since most stock brokers studied finance in college, they often focus more on P/E ratios and less on economics and global capital flows.
However, these large flows from big money (hedge fund or central bank money) create the overall trend in the markets influencing the value of bond yields, currency exchange rates, and ultimately equities like bank stocks. By monitoring the trends and the large flows of global capital, we can help avoid that dreaded "bad trade" or avoid getting stopped out of a good trade that eventually might have been a winner in the long run.
This analysis is not meant to sound negative on banks in fact, I believe banks should do well in both a rising growth and yield environment.
Below is the 10-year yield volatility following the last three Fed hikes.
Why do yields fall after a hike in interest rates?
Here's Bank of America's stock price reaction to the last three Fed hikes:
Here's the 10-year yield, Bank of America, with JPMorgan Chase and the XLF Financial ETF.
Global capital flows into the U.S. are driving down yields and somewhat offsetting the Fed hikes or at least, offsetting the Fed's plans for steepening the yield curve in their effort to get banks to lend more money and normalize the Fed's interest rate policy.
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Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: In full disclosure, this article is not a comprehensive analysis of Bank of America or bank stocks. I am not a financial advisor, and we will only be analyzing a few of the many fundamental and economic factors that go into driving the stock price and profitability of BAC. Before making any investment decision, please contact your financial advisor. And of course, any analysis of past performance does not guarantee future results.