Dive Brief:

• The Federal Reserve’s signaling that it will lower short-term rates later this month is good for banks’ profitability, Gina Sanchez, CEO of Los Angeles-based investment advisor Chantico Global, said in a CNBC interview this morning. 
• This is the case even though banks typically do best in a rising interest rate environment, which enables them to earn more in interest income. 
• What’s different this time, said Sanchez, is the spread between short- and long-term rates. After compressing earlier this year, the spread is widening, and as long as that continues, banks will profit. “The spread is remaining high and I think that’s good for banks,” says Sanchez.

Dive Insight:

In mid-March, rates were compressing, according to Treasury data, and even flirting with an inverted yield curve. The 10-year rate was 2.63%, compared to a two-year rate of 2.46%. The spread was even narrower for the seven and one-year rates, which were 2.52% and 2.53%, respectively.

But since then, the spread has widened, and now long-term rates are at a healthy place relative to short-term rates. As of Friday, the yield on the 10-year Treasury was 2.12%, compared to 1.84% for the two-year note, a spread of 28 basis points. 

Should the spread start narrowing again, the outlook for banks will weaken, says Zacks analyst Swayta Shah, writing for Yahoo! Finance. “Growth in banks’ net interest income is expected to get hampered.”

In its interest rate forecast, Kiplinger predicts long-term rates to rise, possibly to the upper 2% range, which would keep the spread wide as long as the Fed continues to hold short-term rates low or even lowers them again later this year, as analysts expect.