Thursday, taking their cue from a rally in U.S. Treasury bonds.
The American Banker index of the top 50 U.S. banks rose 1.4%; the American Banker 225 climbed 1.1%.
Long-term bonds rallied on news that the Bank of England and the European Central Bank had raised interest rates. Though the moves were expected by the markets, the rate hikes abroad were another favorable sign to investors that the Federal Reserve will not raise rates at the Nov. 16 meeting of the Federal Open Market Committee, its policy-setting arm.
If the British and European Union rate increases cool demand at home, this also would reduce inflationary pressures in the United States, economists said.
Thursday's rise in financial stocks "is related to the expectation that the Fed is less likely to raise interest rates," said Sung Won Sohn, senior vice president and chief economist for Wells Fargo & Co. in Minneapolis. He said the hikes in Europe are more evidence that would dissuade the Fed from raising interest rates.
The European Central Bank announced Thursday that it raised its refinancing rate to 3%, up from 2.5%, and the Bank of England bumped up its benchmark rate to 5.5%, from 5.25%.
Yields on 30-year U.S. Treasuries fell 3 basis points, to 6.10%. Many investors' decisions on whether to buy bank stocks are based on the yield on Treasury bonds. When bond yields fall, as they did Thursday, the tendency is to buy bank stocks.
Adding to an upbeat atmosphere for bank stocks, recent economic indicators such as the employment cost index and the gross domestic price deflator have encouraged investors to believe the Fed will not raise rates. That is partly the reason bank stocks -- while having bounced around since their furious two-day rally last week -- are trading about 20% higher than their 1999 lows of mid-October.
"We overshot on the downside and now we are coming back to the old trading range that existed in the spring and summer," said Phil Cuthbertson, head trader at Keefe, Bruyette & Woods Inc. in New York.
"We have had a string of soft economic numbers in the last week and a half. The rally gave the bond market some confidence about interest rates and inflation," Mr. Cuthbertson said. "You put that together with the previous decimation of the group and it's a melt-up."
On Thursday buyers were out in force. Even two large sales of Citigroup Inc. shares failed to drag the stock into negative territory. Near midday, the stock was flying high, up $2.0625, before two block trades totaling 31.7 million shares -- or $1.7 billion -- shaved most of its gains, according to a Bloomberg report. Yet the equity later finished up $1.75 for the day, or 3.3%, closing at $54.75.