September 20, 2017 / 9:02 PM / a year ago

Bank stocks stand out as quick winners of Fed's latest move

Sept 20 (Reuters) - Shares of U.S. banks shot to a six-month high on Wednesday afternoon, lifted by a sharp rise in bond yields after the U.S. Federal Reserve signaled it was likely to raise interest rates again by the end of the year.

Amid an otherwise modest equity market response to the Fed's latest policy announcement, the move up in bank stocks stood out and tracked closely a climb in yields on U.S. Treasury securities.

The Fed, as widely expected, left interest rates unchanged at the conclusion of its latest two-day policy meeting and announced an October start date for the process of winding down its $4.2 trillion portfolio of bonds.

Still, a majority of Fed policy makers projected that they see the U.S. central bank's benchmark rate rising by a quarter percentage point by year end from its current range of 1 percent to 1.25 percent.

U.S. benchmark 10-year Treasury note yields rose as much as 2.29 percent, the highest since Aug. 8., while two-year yields rose to the highest since November 2008.

That prompted a sector rotation out of stocks like utilities - with the S&P utilities index down 0.8 percent - and into banks. Investors typically sell shares of utilities when interest rates rise, partly because they lose their appeal as bond proxies since investors can expect similar returns investing in bonds.

"All the move is beneath the surface," said Michael Purves, chief global strategist at Weeden & Co. "Banks are up and utilities are down. The interest rate-sensitive (stocks). Banks want that yield curve to be steeper."

The S&P 500 bank index gained more than 0.7 percent to its highest since early March, led by gains of more than 1 percent in a clutch of large regional lenders, including Suntrust Banks Inc, Zions Bancorp, PNC Financial Services, M&T Bank Corp and Regions Financial Corp.

PNC shares touched a record $133.69 before closing at $133, up 1.3 percent.

Regional banks rely more extensively on loans as a profit source than the country's largest banks, which also have significant investment banking and securities trading operations. The rise in bond yields augurs for higher real interest rates they can charge customers for loans, which in turn should pad these banks' bottom lines.

Since the election of Donald Trump as president in November 2016, bank shares have outpaced the wider market by a roughly two-to-one margin on optimism that the administration's pro-business policies would accelerate economic growth and demand for bank credit. The banks index is up more than 32 percent compared with a gain for the wider S&P 500 index of 17 percent. (Reporting by Dan Burns; additional reporting by Megan Davies; Editing by Jonathan Oatis)

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