The financial stocks have been surging lately in anticipation of another Federal Reserve rate hike, which is driving the yields higher. This is especially true as 10-year Treasury yields climbed to 3.11%, near its highest level of the year, just ahead of the two-day meeting concluded later in the day. Two-year yields hit a high of 2.842% — the highest level since Jun 25, 2008.

The central bank is expected to raise interest rates for the third time this year by 25 bps to 2-2.25% in its meeting. This would mark the eight rate hike since December 2015. Per the CME Group’s FedWatch Tool, interest rate futures traders are fully pricing in a third rate increase at the September meeting.

Growing inflationary pressure, an accelerating job market and a booming economy are compelling the Fed for aggressive rates hike. In the latest Fed minutes, the Federal Open Markets Committee (FOMC) provided an upbeat view of the economy, solidifying chances of a rate hike at the September meeting.

Notably, an upbeat August job report has bolstered the case for a faster-than-expected rates hike once again. The U.S. economy added 201,000 jobs in August, representing 95 consecutive months of job additions — the longest growth streak. Meanwhile, average hourly wages accelerated 10 cents to $27.16, taking the year-over-year increase to 2.9%, the biggest yearly rise since April 2009. The unemployment rate remained stable at nearly a two-decade low of 3.9%.

The American economy has been on a solid growth path with GDP growth expanding 4.1% annually in the second quarter, representing the fastest pace of growth in nearly four years. Further, Americans are most optimistic about economic growth with consumer confidence hitting an 18-year high.

A Boon for Banks

A rising rate environment is highly beneficial for the financial sector, as it would bolster profits for banks, insurance companies, discount brokerage firms and asset managers. Notably, banks are in the most advantageous position. This is because they seek to borrow money at short-term rates and lend at long-term rates. With the steep rise in long-term interest rates, banks would be able to earn more on lending and pay less on deposits. This would expand net margins and bolster banks’ profits.