Why Bank of America Shares Jumped 5% on Monday

By Jordan Wathen Markets Fool.com

What happened

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Shares of Bank of America (NYSE: BAC) 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.

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.

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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.

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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Jordan Wathen has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.