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Recent history says a flattening yield curve could actually be good for bank stocks

VIDEO1:0901:09
Why a flattening yield curve could be good for bank stocks

Yields on long-term government bonds fell again this week.

The so-called yield curve continued to flatten with the 2-year note inching closer to the yield on the 10-year.

A flattening, or worse, inverted yield curve has preceded every recession since 1962; however, not every inverted yield curve has led to a recession.

Last week, the yield on the 10-Year U.S. Treasury dropped below 3 percent for the first time since August.

When the 10-year yield has crossed below 3 percent for the first time in at least a month, the top-performing sector four weeks after is financials (that is, since the end of the financial crisis in March 2009).

The sector gains an average of 3.5 percent, trading positively 86 percent of the time.

It's a counter-intuitive trade, since banks typically make more money as rates go higher.

That's because the spread between what they borrow at and what they lend at widens.