Magazine article American Banker

Morgan Gets Paper-Thin Yield on Notes

Magazine article American Banker

Morgan Gets Paper-Thin Yield on Notes

Article excerpt

Morgan Gets Paper-Thin Yield on Notes

Exploiting an aberration in the market for two-year Treasury securities, Morgan Guaranty Trust Co. recently issued $200 million of notes at the slimmest of yield premiums.

Morgan's two-year notes were priced at a discount to yield 6.85%, or 20 basis points over Treasury securities issued May 31. But the comparison was misleading because the yield on the new Treasuries was an artificially low 6.65%.

Compared with the prevailing rates for outstanding Treasuries due in two years, ranging from 6.71% to 6.75%, Morgan did far better than most investors believed. The notes, handled by Merrill Lynch & Co., carried a 6.75% coupon.

Managements usually dislike short sellers because they drive down stock and bond prices. But in this case, they inadvertently helped Morgan to strike an attractive deal.

Avenue to an Uptick

These short sellers got caught in a rare squeeze when they could no fulfill commitments to deliver new notes to investors. Other investors stepped in first and snapped up most of the notes, causing an uptick in demand.

Rising demand drove the price up and the yield down, out of sync with prevailing yields. That allowed astute borrowers to issue at low rates - by using the low yield on the new notes as a benchmark.

A source at Merrill said a number of other banks issued two-year notes at the same time, through unpublicized medium-term note programs.

"The spread between two and three year Treasuries had gotten as wide as plus 50 [basis points]," the Merrill source said. …

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