As a follow up to last week’s  banking stocks trading ideas. I would like to show how bond yields affect local banking stocks.  

Bond yield definition:

According to Investopedia: “A bond yield is the amount of return an investor realizes on a bond. Several types of bond yields exist, including nominal yield which is the interest paid divided by the face value of the bond, and current yield which equals annual earnings of the bond divided by its current market price. Additionally, required yield refers to the amount of yield a bond issuer must offer to attract investors.”

 Source: Bloomberg

The above is the current rating for the South African 10 year bond. In summary, the overall outlook is negative, with Fitch as the exception having a stable outlook.

Source: Bloomberg

In the chart above, you can see that the 10-year yield is testing the support level, which it has tested since December 2015. Banks generally have a negative correlation with the 10year government bond, by this I mean if the yield of the 10 year government bond blows out (i.e goes higher) the value of local banks should come lower. By the looks of things, the yield is bouncing off the support line and this will confirm my trades for the banks. If the yield on government bonds increases, it essentially means that investors will seek a higher return for their money and this in turn will shrink margins for banks.  Government bonds normally has  higher rating than corporate bonds,  so if government bonds re rate corporate bonds are likely to re rate in the same direction as government bonds.    

Below I have illustrated the relationship of the JBNKS index to the RSA 10-year bond. If we look at the movement of the JBNKS index (white line) from June of this year to date, we can see that the index has advanced higher.  In the same reference period, the 10-year bond (the orange line) has come lower, which has essentially given rise to the banking stocks.   The JBNKS index is made up of the 6 largest banks listed on the JSE measured by market capitalisation.

Source: Bloomberg

Remember... trade responsibly, your capital is at risk and trading can lead to capital losses.

Until next time, I wish you profitable trading.

 All charts sourced: Bloomberg