The financial sector and bank exchange traded funds (ETFs) jumped Wednesday on a steepening yield curve ahead of the Federal Reserve announcement.
The SPDR S&P Regional Banking ETF (NYSEArca: KRE), the largest regional bank ETF, which have been thirsting for higher interest rates, increased 3.2% Wednesday. The fund also broke above its long-term resistance at the 200-day simple moving average.
The iShares U.S. Regional Banks ETF (NYSEArca: IAT) and PowerShares KBW Regional Bank Portfolio (NYSEArca: KBWR), which both include greater tilts toward smaller banks, gained 3.0% and 3.3%, respectively. IAT and KBWR were also trading back above their long-term trend lines as well.
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Additionally, the SPDR S&P Bank ETF (NYSEArca: KBE) and PowerShares KBW Bank Portfolio (NYSEArca: KBWB), which lean toward larger companies, rose 3.1% and 2.9%, respectively. KBWB follows a market cap-weighted index, which make the index heavy on prominent banking names. KBE, on the other hand, tracks an equal-weight indexing methodology, so the ETF will include a greater tilt toward mid-cap banks.
Meanwhile, the broader Financial Select Sector SPDR (NYSEArca: XLF), which includes a 33.8% tilt toward banks, added 1.7% Wednesday.
Bank stocks strengthened as longer-dated Treasury yields rose in anticipation the Fed will begin another round of interest rate hikes. Yields on 2-year Treasuries rose 2 basis points while yields on benchmark 10-year notes gained 6 basis points before the Fed announcement.
[related_stories]With a steepening yield curve, or wider spread between short- and long-term Treasuries, banks could experience improved net interest margins or improved profitability as the firms borrow short and lend long.
“A bull steepener (steepener with lower rates) is more accretive to bank earnings than a bear steepener, but either is better than a flattening curve for bank margins, all else equal,” Bespoke Investment Group Macro Strategist George Pearkes told Bloomberg. “The market has basically decided that banks equal a leveraged steepener so when the curve flattens they’ve underperformed and vice versa.”
Related: Financial Sector ETFs Maintain Momentum
Moreover, the financial sector received a boost from Presidential candidate Donald Trump after he proposed dismantling nearly all of Dodd-Frank, the package of financial reforms placed after the depression.
“Dodd-Frank is a very negative force, which has developed a very bad name,” Trump told Reuters.
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SPDR S&P Regional Banking ETF