TEN-YEAR TREASURY YIELD EXCEEDS 1% FOR FIRST TIME SINCE MARCH -- THAT'S HELPING MAKE FINANCIALS THE DAY'S STRONGEST SECTOR -- MATERIALS AND INDUSTRIALS HIT RECORDS
10-YEAR TREASURY YIELD EXCEEDS 1%... Bond yields and stocks are climbing sharply today on hopes for more stimulus spending. And the market is being led higher by more economically-sensitive stocks like financials, materials, energy, and industrials. Financials in particular are getting big boost from rising bond yields. Chart 1 shows the 10-Year Treasury Yield climbing 9 basis points to rise above 1.00% for the first time since March. Some of that money leaving Treasury bonds appears to be rotating into stocks. The climb in yields and a steepening of the yield curve are helping make financials the day's strongest sector. And banks in particular.
FINANCIAL SPDR NEARS NEW RECORD...Chart 2 shows the Financial SPDR (XLF) gaining nearly 5% today and challenging its February high for a new record. Financials have gone from market laggards for most of last year to market leaders over the past couple of months. That improvement can be seen by their rising relative strength ratio in the upper box. A lot of that improvement is tied to higher bond yields and stronger bank stocks.
BANKS STOCKS LEAD FINANCIALS HIGHER... Bank stocks are up more than 7% today and are leading the XLF higher. Banks are getting the biggest benefit from the steepening yield curve which boosts their net interest margin (the difference between long and short-term rates). Chart 3 shows the S&P Bank SPDR (KBE) rising sharply to the highest level since the first quarter. A couple of larger banks like Goldman Sachs (GS) and Morgan Stanley (MS) are already in record territory. The rising relative strength ratio in the upper box shows the KBE outperforming the S&P 500 for the last three months. Rising bond yields have had a lot to do with that better bank performance.
MATERIALS AND INDUSTRIALS ALSO HIT NEW RECORDS...Economically-sensitive materials and industrials are also setting new records today. Chart 4 shows the Materials SPDR (XLB) rising nearly 5% to set a new record in decisive fashion. It's being led higher by stocks tied to paper, aluminum, copper, and steel which are closely tied to those rising commodities. That's part of the so-called reflation trade which is one of the factors driving bond yields higher. Chart 5 shows the Industrial SPDR (XLI) also touching a new record today. The XLI is being led higher by building materials and heavy construction stocks which are tied to infrastructure spending.
GEORGIA EFFECT... The main rationale being given for today's big stock gains is that a Democrat sweep of the Georgia runoff election for the U.S. Senate would greatly increase the chances for more stimulus spending in the months ahead. That increase in spending would result in higher bond yields. And it would increase demand for stocks tied to higher bond yields, higher commodity prices, and more spending on infrastructure. That includes energy which is also one of today's strongest groups. The Dow and S&P 500 are in record territory. The Nasdaq Composite Index has recovered from early selling, but is being held back by weaker technology stocks. Small cap stocks are having an especially strong day. Russell 2000 iShares (IWM) are up 5% and in record territory.
