Regional Banks Looking Vulnerable

When the yield curve began to steepen dramatically in the beginning of May, regional banks were some of the biggest beneficiaries. Since banks tend to borrow on the short end of the yield curve and lend on the long end, a steeper yield curve helps them to generate profits. This is especially true for smaller regional banks, which tend to be heavily involved in mortgage lending. Shares of those regional banks took flight as long-term U.S. Treasury yields shot higher, taking mortgage rates along for the ride.

Now, the situation is reversed. According to Freddy Mac, mortgage rates reached a two-month low this week, falling to 4.32% from last week's 4.5%. Long-term Treasury yields have faded in the wake of the Federal Open Market Committee's decision to delayed stimulus tapering, and that has resulted in a flatter yield curve. This process may not be over, either, according to the chart of the iPath U.S. Treasury Steepener (STPP)....282 more words left in this article. To read them, just click below and try Real Money FREE for 14 days.

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