Bond yields rose on Sep 19, extending the week’s climb, as investors took escalating trade related tensions in stride, and focused more on solid economic data and promising corporate outlook. The yield on the 10-year Treasury note, a benchmark for interest rates, has hit a four-month high. The Federal Reserve, in fact, has stepped up the pace of monetary tightening, with Chairman Jerome Powell vouching for a steady path of interest rate hikes.

Investors have thus exited bond proxies, including utilities, real estate, telecom, and consumer staples, to name a few. Meanwhile, banks rallied on expectations to benefit from a rise in benchmark bond yield.

Bond Yields Climb North

The 10-year Treasury note yield jumped 3.3 basis points to 3.081% on Sep 19, the highest since May 17 and close to its seven-year high of 3.109%. The 10-year note yield had crossed the coveted 3% mark on Sep 18, the first time since late May. The benchmark bond yield had exceeded the mark briefly in 2013 and January 2014, which was toward the end of the bond market wipeout, better known as the “taper tantrum.”

The 30-year bond yield also climbed 3.1 basis points to 3.236%, almost near a four-year high of 3.246%. Jeffrey Gundlach, chief executive officer of DoubleLine Capital and a renowned bond market expert, expects 6% on the 10-year yield by the next presidential election or the year after. He added that “a move soon to higher yields would be signaled by the 30-year closing two days in a row over 3.25%.”  By the way, the 2-year note too changed hands at a decade high of 2.816%.

What’s Acting in Favor of Bond Yields?

Bond yields are rising, as bond prices decline. The bond market is becoming less attractive as investors continue to load up on U.S. stocks. After all, investors are shrugging off growing trade tensions between the United States and China. And why not? President Trump did build pressure on Beijing by announcing tariffs on nearly $200 billion of Chinese products in response to “unfair trade practices.” China, in the meantime, retaliated with tariffs of 5% to 10% on $60 billion worth of U.S. products. But, investors see the tariffs as less consequential than apprehended. This is because the United States did not stick to the initial 25% tariff imposition plan. China has also applied a 10% tariff on certain goods that it had earlier earmarked for a 20% levy.

Investors rather chose to focus on an improved economy and strong corporate earnings growth, which wasn’t affected by weaker trade. Americans haven’t been this confident about the economy in 18 years. Per the Conference Board, the consumer confidence index climbed to 133.4 in August from a revised 127.9 in July, the highest level since October 2000.

Consumers’ optimism was largely driven by strength in the labor market. The current unemployment rate is now at a nearly two-decade low, while the U.S. economy has added jobs for 95 successive months in August, the longest stretch on record.

In fact, investors are getting optimistic about U.S. stocks, largely because of the encouraging outlook for corporate profits. Per the latest monthly survey of fund managers by Bank of America Merrill Lynch, there is a net allocation of 21% overweight to the U.S. equity market, the highest since January 2015. The survey also showed that a net 69% of those who polled believe that the United States has the most encouraging earnings expectation picture.

Rise in Bond Yields Boosts Banks

Higher bond yields can boost bank profits as they increase the spread between what banks earn by funding longer-term assets, such as loans, with shorter-term liabilities. The spread between long-term and short-term rates also expands during interest rate hikes because long-term rates tend to rise faster than short-term rates.

By the way, Powell told the Senate Banking Committee that “with a strong job market, inflation close to our objective, and the risks to the economy roughly balanced, the FOMC believes that – for now – the best way forward is to keep gradually raising the federal funds rate.”

The Fed has raised its benchmark federal funds rate by a quarter percentage point to a range of 1.75% to 2% this year. The Fed’s dot plot, in fact, indicated that policymakers predict two additional rate hikes this year for a total of four increases instead of the three planned earlier.

5 Top Bank Stocks to Buy Now

We have, thus, selected five solid bank stocks that are poised to gain from rise in bond yields. These stocks boast a Zacks Rank #1 (Strong Buy) or 2 (Buy).

Wintrust Financial Corporation (WTFC - Free Report) operates as a financial holding company in the Chicago metropolitan area, Southern Wisconsin, and Northwest Indiana. It operates in three segments: Community Banking, Specialty Finance, and Wealth Management. The company has a Zacks Rank #2.

In the last 60 days, three earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 1.3% in the same period. The company’s projected earnings growth rate for the current year is 36.8%, while the Banks - Midwest industry is expected to rally 29.4%.

Comerica Incorporated (CMA  - Free Report) provides various financial products and services. The company operates through three segments: Business Bank, the Retail Bank, and Wealth Management. The company has a Zacks Rank #2.

Over the last 60 days, 10 earnings estimates moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 0.9% in the same period. The company’s projected earnings growth rate for the current year is 49.2%, while the Banks - Major Regional industry is estimated to rise 27.2%.

Blue Hills Bancorp, Inc. (BHBK - Free Report) operates as the bank holding company for Blue Hills Bank that provides financial services to individuals, families, small to mid-size businesses, government, and non-profit organizations in Massachusetts. The company sports a Zacks Rank #1.

In the last 60 days, one earnings estimate moved up, while none moved down for the current year. The Zacks Consensus Estimate for earnings rose 8.7% in the same period. The company’s projected earnings growth rate for the current year is 78.6%, while the Banks - Northeast industry is expected to grow 22%. 

Union Bankshares Corporation (UBSH - Free Report) operates as the bank holding company for Union Bank & Trust that provides banking and related financial services to consumers and businesses. The company has a Zacks Rank #2.

Over the last 60 days, one earnings estimate moved north, while none moved south for the current year. The Zacks Consensus Estimate for earnings rose 1.8% in the same period. The company’s projected earnings growth rate for the current year is 45%, while the Banks - Southeast industry is expected to climb 31%.

First Financial Bankshares, Inc. (FFIN  - Free Report) provides commercial banking products and services, primarily in Texas. The company has a Zacks Rank #2.

In the last 60 days, 2 earnings estimates moved up, while none moved down for the current year. The Zacks Consensus Estimate for earnings rose 2.3% in the same period. The company’s projected earnings growth rate for the current year is 28.8%, while the Banks - Southwest industry is likely to rally 14.6%.