Investors have pushed up the exchange-traded fund representing regional banks, the iShares Dow Jones US Regional Banks (IAT) , by nearly 6% since early August while selling the iShares Barclays 20+ Year Treasury Bond (TLT) ETF because they think the Fed may raise benchmark interest rates before next summer.
The relationship between regional banks and rising long-term rates is simple: regional banks largely make their money from paying interest on short-term deposits while turning around and investing in longer-term bonds. As the bond market drives Treasury yields higher, banks put that same money in Treasuries and get a greater return.
So regional banks will make larger profits simply by capturing the increased spread between short-term and long-term rates.
Although the Fed is not expected to raise interest rates before it completely winds down its bond-purchasing program, analysts are looking for clues at next week's meeting that could possibly signal a tighter policy stance.