Magazine article American Banker

Bond Buying by Banks Winds Down

Magazine article American Banker

Bond Buying by Banks Winds Down

Article excerpt

NEW YORK -- Banks may finally be winding down their purchases of municipal bonds after a flurry of buying this fall.

That buying, which a number of dealers have described as the heaviest since at least 1982, was inspired by a need to shelter profits and the expected tax code change, which would eliminate banks' 80% deduction for the interest costs on the money they borrow to hold tax-exempt securities.

In the last two weeks, however, some dealers and portfolio managers said they have noted a slowdown in buying as banks approach their desired levels of tax-exempt holdings and yields on tax-exempt investments continue to drop.

"The bank buying has slowed down, even if it hasn't stopped," said A. Theodore Palatucci, vice president and manager of national trading and underwriting at Merrill Lynch Capital Markets. "We have had a tremendous move down in yields the past month, and that is bound to give people pause -- particularly if they were coming to the end of their buying programs anyway."

The proposed Jan. 1, 1986, effective date for the tax reform proposal is an added concern.

Mr. Palatucci said, "There is a fear that bonds bought now may not be delivered by the beginning of the year and, thus, the banks would not be eligible to deduct their cost of carry. This was certaintly a problem with a recent Texas general obligation issue."

At Wachovia Bank & Trust Co. in Winston-Salem, N.C., M. Rex Teany, manager of the dealer bond operation, said that "the purchasing of bonds by banks has probably peaked, though there will continue to be a good business from Johnny-come-latelies." Wachovia, he said, currently makes 50% of its sales of tax-exempt bonds to commercial banks.

"It is typically true for banks to establish their profits outlook at the end of the third or beginning of the fourth quarter and then to begin a program of buying tax-exempts if there is the need," he said. …

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