As value investors, we don’t spend much time looking at charts or technical indicators. Most of our efforts are directed at identifying underperforming companies and strong dividend yields. For many value investors, these technical indicators are more “noise” in an already raucous marketplace.
There are times, however, when these technical indicators aren’t just for those in the “chartist” community. These technical indicators can signal important psychological changes in the market that value investors can capture. We are approaching one of these inflection points when looking at the daily yield on the 10-Year Treasury.
Since 1989, the daily yield on the 10-Year Treasury has been in a descending channel pattern, identified in red on the chart above. Technical traders who bought bonds at the high end and sold bonds on the low end of this channel would have done well for themselves during the last three decades. A significant close below, or above, this channel indicates the overall trend is changing.
With interest rates moving higher and a (for now) accommodating Federal Reserve, the 10-Year Treasury yield is poised for a breakout. Looking at the chart, a close above 3.80% will signal to most traders that the decades-long bull market in bonds is coming to a close and the overall interest rate environment is shifting.
Bond investors will be watching this closely, but there is one sector in particular that value investors should consider –Â banking and financial services.
It's all in the lending margins
Banks are a clear choice for a rising rate environment as higher interest rates encourage a wider net interest margin. This margin, showing the difference between interest paid on deposits and interest received for loans, has been steadily declining since 2010. In 2015 this dipped below 3.00%, the lowest reading since the Federal Reserve has been keeping record.
Click here to access the Federal Reserve database where you can see quarterly updates of this margin. Higher interest rates, as driven by the federal funds rate, will help increase this margin which is historically low.
Will rates continue to rise and break the trend on the 10-year Treasury? The next big calendar event is Jan. 31 through Feb. 1, when the Federal Reserve will hold its first Federal Open Market Committee meeting of the year.
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