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Why Bank of America Shares Jumped 5% on Monday

By Jordan Wathen - Apr 24, 2017 at 1:53PM

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U.S. Treasury yields are rising on higher odds of a June rate hike by the Federal Reserve.

What happened

Shares of Bank of America (BAC 0.95%) are leading U.S. bank stocks higher, rising by as much as 5% on Monday as yields on U.S. Treasuries push higher.

So what

The yield on the 10-Year U.S. Treasury is rising for the fourth straight day in a row, jumping to 2.28% on Monday from a relative low of 2.18% on April 18, 2017. The market is now pricing in higher odds of a June rate hike by the Federal Reserve, which would be a boon for most American banks.

Stock chart superimposed on digital map of the world

Image source: Getty Images.

The odds of a June rate increase rose to a 66% chance vs. 53% on Friday, based on implied odds extrapolated from the futures market. A rate increase by the Fed would be especially good for Bank of America's earnings, given it is sensitive to interest rates on the short end of the curve.

On its most recent conference call, the company explained that a 1-percentage-point increase in rates across the curve would add $3.3 billion to net interest income, of which "nearly three-quarters" would come from the short end of rate curve. The short end of the rate curve is most affected by any changes in the Fed Funds rate. 

Bank of America's share price charted against 10-Year Treasury yields

Data source: Yahoo! Finance. Chart by author.

Now what

Frequently one of the most active stocks on the market by volume, many traders and investors use Bank of America shares as something of a leveraged bet on the direction of interest rates. With the market pricing in greater odds of a rate increase, it's no surprise to see Bank of America shares moving higher in active trading on Monday.

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