“Higher rates are a tailwind for financial stocks, in large part because of bank net interest margin, or the difference between the interest they earn on the loans they make and the interest they pay out. Higher interest rates can boost net interest margins, which can lead to higher earnings,” reports Ryan Vlastelica for MarketWatch.
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.
The Fed is believed to be targeting three rate hikes in 2017 while Fed funds futures data currently imply the U.S. central bank will boost borrowing costs twice this year.
Wednesday’s “move in financial ETFs only extended their recent advance. The Select Sector fund, the largest ETF to track the space with $25.3 billion in assets, is up more than 40% over the past 12 months. In addition to growing expectations for higher rates, the industry has also been supported by the prospect of lower regulations under President Donald Trump. Financials have comprised the bulk of the overall market’s postelection move,” according to MarketWatch.
For more information on the financial sector, visit our financial category.