Odds are increasing that the Federal Reserve could raise interest rates for the first time this year in December.
Those looking for further confirmation of that fact should look to the recent leadership displayed by exchange traded funds such as the Financial Select Sector SPDR (NYSEArca: XLF) and the iShares U.S. Financials ETF (NYSEArca: IYF).
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.
Heading into this year, many market observers expected four Fed rate hikes, a number that subsequently dropped to two and now, in the eyes of some experts, zero.
Related: Financial Sector ETFs Maintain Momentum
However, the rate hike outlook has swiftly changed in recent weeks with some bond traders seeing it as almost guaranteed a rate hike will come in December, which would be a boon for ETFs like XLF.
“Not much has changed fundamentally for banks. They still face increased regulatory pressure, and profitability has been difficult amid a flat yield curve and a Fed that has been on hold with interest rate increases this year,” reports CNBC.
Higher interest rates would help widen the difference between what banks charge on loans and pay on deposits, which would boost earnings for the financial sector.
SEE MORE: Bullish Signs for Bank ETFs
“Optimism for the banks comes at a good time. Quarterly earnings reports for the biggest financial institutions start rolling in on Friday, so the recent rise could be in anticipation that the numbers won’t be as bad as feared,” according to CNBC. “Individually, Bank of America and Citigroup led the gains among the biggest banks, while SunTrust, Regions Financial and KeyCorp have led the way among regionals in October.”
Regional banks are among the stocks most positively correlated to rising interest rates because higher rates improve net interest margins. The SPDR S&P Regional Banking ETF (NYSEArca: KRE) is up two-thirds of percent year-to-date.
For more information on the banking sector, visit our financial category.